Oil Price Volatility: Is Commodity Super Cycle Out of Order?

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Summary

• Oil prices have increased at a steady pace this year, with WTI Crude Oil price recording a gain of over 20 per cent.
• Heightened volatility in the oil prices this week has again sparked discussions around the prospects of the commodity super cycle.
• While some bearish concerns continue to weigh on oil prices, the long-term outlook for the oil market seems quite promising amid economic recovery and vaccination progress.

Commodities are displaying an intriguing show in the global market, with oil price volatility drawing massive attention. The latest whipsaw in oil prices seems to be moving against the speculations of the commencement of the new commodity super cycle.

Oil has staged a tremendous rally this year, backed by a vaccine-driven rebound in demand and significant supply cuts by the Organization of Petroleum Exporting Countries (OPEC). Growing at a decent pace, the West Texas Intermediate (WTI) Crude Oil price has surged by over 20 per cent this year.

Oil prices were on a volatile ride this week amid Suez Canal disruptions, renewed pandemic-related lockdowns, signs of softening physical demand and the unravelling of long positions.

Oil Price Volatility Raising Eyebrows

Oil prices climbed by around 6 per cent on Wednesday after a large cargo ship wedged across Suez Canal, blocking the path of several other ships waiting to cross through on both sides. The incident blocked about 10 tankers containing 13 million barrels of oil.

The recent rise in oil prices was further supported by the promising data from the US Energy Information Administration that demonstrated recovery in refinery runs and gasoline demand after a winter storm shut Texas refineries in February 2021.

While Suez Canal disruptions gave the much-needed push to the oil prices initially, fresh COVID-19 lockdowns across the globe reignited worries over demand for oil products, causing oil prices to plunge by around 4 per cent on Thursday.

However, the oil prices reversed a sharp fall on Friday while rising by about 2 per cent on fears that Suez blockage may last for weeks. At the time of writing, the WTI Crude Oil price stood at USD 60.02 a barrel.

It is worth noting that the Suez Canal is just a temporary shipping issue for oil, while renewed lockdowns in Europe and Asian countries could hamper the demand-supply equation for a relatively long period.

Demand Concerns Loom over Oil Price Revival

The commodity rally seen in 2021 amid widespread economic recovery had initially been fueling market expectations of a supercharged commodity boom - a protracted upward movement in prices of commodities owing to a structural change in the way demand outstrips supply. However, hopes of a sustained recovery in crude oil prices appear to have been dashed with another wave of the pandemic.

The suspension of the use of the AstraZeneca COVID-19 vaccine by several European nations has further put the recovery of fuel demand under pressure. Many European countries, including Iceland, Lithuania, Estonia, Norway, Austria, Luxembourg, and Denmark, have lately clamped down on AstraZeneca’s vaccine over safety concerns, halting the use of jab in COVID-19 patients.

Must Read: Countries Divided over Usage of AstraZeneca's COVID-19 Jab

Investors have been jittery over the past few days over the impact of the slow pace of vaccinations in Europe on economic revival and oil demand. Experts believe a complete recovery in oil demand to the pre-pandemic stage demands a rapid and successful inoculation of the global population.

Green Shoots of Hope

The recent weakness in oil prices has also put the OPEC+ alliance’s next move into question. OPEC+ is likely to have an important say in the working of the oil super cycle. If OPEC+ rolls over their existing supply curbs into May in the upcoming meeting, oil prices may get a decent push over the coming days.

Also Read: Oil soars on OPEC+ decision, supply quotas unchanged for April

While some market turbulence is casting dark shadows over the oil prices, the oil demand is expected to bounce over the long run on the back of stimulus packages, economic revival, easing pandemic measures and large-scale vaccination progress.

As per the International Energy Agency, the global oil demand tumbled as much as 30 per cent during the worst of the COVID-19 lockdowns in March and April last year. However, it is now back at around 95 per cent of the pre-coronavirus high of just more than 100 million barrels of oil per day hit in 2019.

No doubt, many potholes lie in the road out of the COVID-19 pandemic amid ongoing demand concerns from fresh lockdowns. However, the sooner the people will move to their former lives and get vaccinated, the earlier the oil market is expected to return to the pre-pandemic stage.