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- Crude oil has recorded an impressive recovery in the past one year and is currently trading at US$63.24 a barrel.
- The pandemic’s onset led to a major demand destruction creating a severe oversupply situation, which is responsible for the oil price decline.
- OPEC+ has been proactively cutting down on oil supplies to avoid oversupply in the market.
The rally in the crude oil prices has delivered a shot in arm for the crude oil market battling against the prevailing antagonists such as weakening of US Dollar, ambiguities around demand recovery and rising COVID-19 infection rates across Europe and India.
On the contrary, the guardians of the crude oil producers namely, OPEC+ and OECD, have been supporting the crude oil prices via extending the supply cuts at a time when the oil demand is still recovering.
Brent crude oil 1 month futures Source: Eikon Refinitiv
The crude oil prices are dominated by the prevalent macroeconomic factors, the abundance of oil in the market and the demand. In case, when the demand is low when the supply is not adjusted, a situation of oversupply exists that puts a downward pressure on the oil prices and vice versa. On the onset of the coronavirus pandemic in 2020, the demand disappeared suddenly creating an oversupply situation, which resulted in the filling up of inventories and impacting the price of the commodity.
As per the Australia Energy and Resource Quarterly March 2021 edition, the demand for crude oil stood at 91 mbpd in 2020 and is anticipated to grow to 97 mbpd in 2021.
Supply Concerns - Recently on 1 April, the OPEC and non-OPEC ministers met via web conferencing to discuss oil supply and production cuts in the upcoming months. The meeting was chaired by Saudi Arabian Minister of Energy, HRH Prince Abdul Aziz bin Salman and Deputy Prime Minister of the Russian Federation, HE Alexander Novak.
OPEC Crude Oil Survey Copyright © 2021 Kalkine Media Pty Ltd. Data Source: Eikon Refinitiv
During the meeting, the OPEC+ members decided on the adjusted production levels for May, June and July 2021. They also vowed to steadily increase the production levels in the upcoming few months.
Important Read: Crude Oil Rally Continues on Declining US Stockpile
Also, Saudi Arabia has announced the extension of the additional voluntary supply cut of 1 mbpd in April. The overall conformity to the supply cuts surged to 115% in February 2021, reiterating the strong compliance by OPEC+ members to their respective production quotas.
Crude Oil Inventories - The US crude oil inventories (excluding the Strategic Petroleum Reserves) decreased by 3.5 million barrels for the week ending on 2 April 2021. The US oil inventories stood at 498.3 million barrels, almost 3% higher than the five-year average levels.
The fluctuation in the inventory levels impact the crude oil prices as the higher levels do not leave enough empty storages to store the additional crude oil production. The lack of the inventory space at Cushing, Oklahoma was responsible for the cataclysmic decline in the crude oil prices. Further, the low crude oil price allows countries that are heavily dependent on imported crude oil to buy and store for the upcoming future.