Why the frenzy in crude oil prices may not sustain

Crude oil’s effectiveness as a gauge of economic growth was once again on display during the pandemic. Last March, as the scale of the pandemic was first revealed, Brent oil futures plunged to $22. But with the large stimulus roll-out and gradual recovery in growth, prices too moved higher to $55.

The price of crude oil has, however, been on the boil over the last few weeks, with Brent futures reaching a high of $75 on July 6, recording year-to-date gain of 36 per cent. Indian consumers have also been facing the heat with the retail selling price of petrol hitting ₹100 in all the metros this month.

Speculators and investors seem to have a hand in driving this frenzy. This is evident in the extremely rosy projections of brokerages.

Goldman Sachs expects Brent prices to average above $80 in the third quarter of this calendar year with spikes above that price; JP Morgan expects crude to break above $80 in the last quarter of 2021 and Bank of America projects Brent prices to hit $100 by next summer.

With far-reaching impact of rising oil prices on the economy and consumer budgets, the moot question is, will the rally in crude oil sustain and what is likely to be medium-term price range? The answer lies in the demand-supply equation of crude oil.

Demand-supply equation
Global demand for oil declined from 99.7 million barrels per day (mb/d) in 2019 to 91 mb/d in 2020 as the Covid-19 pandemic dealt a sharp blow.

The hindu businessline
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