Why are crude oil prices on fire in 2021?

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  • Crude oil prices have surged more than 84% in the past one year (as of 28 June 2021), on the back of robust economic recovery and accelerated COVID-19 vaccination.
  • As demand comes roaring back, oil prices are expected to touch new highs in the near future.
  • OPEC+ has played a significant role in stabilising the crude oil market by clearing the oil glut and maintaining the supplies.
  • A potential revival of the US-Iran nuclear deal is expected to add 1Mbpd oil supply into the market.

Crude oil prices recently hit three-year highs, with Brent crude trading above US$75 per barrel and WTI crude oil surpassing US$74 per barrel. Both the benchmarks have risen more than 84% in the last one year.

The majestic rise in crude oil prices is attributed to accelerating demand for transport fuel amid strong recovery in global economic activities and COVID-19 vaccination programs.

Also Read: What are the factors that influence global crude oil prices?

Why are crude oil prices rising?

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Crude oil prices have been following an uptrend since the beginning of 2021. Brent crude has gained traction amid the hopes of improving demand backed by economic recoveries and significant production cuts by the Organization of the Petroleum Exporting Countries (OPEC).

Significant Production Cuts:

Last year, OPEC, which is an intergovernmental organisation of 13 key oil-producing countries, along with Russia and several other major oil-producing countries, prioritised clearing the oil market glut after the pandemic dented the global energy demand.

The group, often referred to as OPEC+, made significant production cuts to stabilise the oil market by controlling the demand and supply.

Moreover, Saudi Arabia cut its production by 1 million barrels per day (Mbpd) between February 2021 and April 2021. The world’s largest oil exporter added 250,000bpd of production in May 2021, while 750,000 barrels of oil is set to be restored in June (350,000 barrels) and July (400,000 barrels).

Additionally, OPEC+ is expected to restore oil production of 350,000 barrels per day in June and 441,000 barrels per day in July.

Must Read: How crude oil dynamics influence the upstream and downstream sectors

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Iranian Oil:

Demand for oil is increasing, thus market experts believe that the gradual withdrawal of cuts would not have any significant impact on oil prices. Oil watchers are of the opinion that the market could absorb extra oil easily.

Lately, there has been significant progress in the talks for the 2015 US-Iran nuclear deal. With a new Iran nuclear deal, international sanctions on Iranian oil would be removed. As a result, oil supply is expected to increase by 1Mbpd in the market. The increased supply is unlikely to have a significant impact on oil prices, as this increase would happen gradually.  

Recovering Economic Activity:

Economic growth is an important factor that impacts crude oil demand and prices. China is the world's largest consumer of crude oil. With nearly five million barrels per day of production, China is mostly dependent on imports. The EU, Japan, India, and many other economies are also net importers of crude oil.

Oil demand is a major function of economic growth. Better-than-expected economic growth results and expectations have paved the way for higher oil demand, thereby driving the prices.

Good Read: Why are the oil prices volatile in May?

US Shale Production:

In the last few years, US shale has emerged as the swing oil producer, playing a vital role in maintaining the oil market equilibrium.

A few things have changed for the US in terms of oil production. The availability of cheap funds due to lower interest rates and advancements in directional drilling technology have boosted the US oil shale production.

Moreover, the US has advanced its technology to extract the maximum oil present in reservoirs.

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Currently, OPEC+ doesn't see a threat from the US, as it has plenty of spare production capacity to curb higher prices and add to the supply if required.

Good Read: What does the future of shale oil market look like?



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