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Will the skyrocketing prices of crude oil sustain and what is likely to be medium-term price range?

With far reaching impact of rising oil prices on the economy and consumer budget, the main question is will the skyrocketing prices of crude oil sustain and what is likely to be medium term price range?

The answer lies in the demand and supply equation of crude oil.

Crude oil prices are rising beyond imagination of even the most bullish traders with Brent crude hitting $80 per barrel and even at these levels there are Wall Street banks and agencies expecting that the prices are headed higher from here. Peter McGuire, CEO of XM Australia predicts that “the prices of crude oil in international market can top $84 by October in a rally driven by rising demand, slowing supplies, and inventory shortage amid a global energy crunch.”

Reasons why the crude oil prices are surging

Post pandemic demand-supply equation:

In April 2020 Oil prices collapsed as the coronavirus pandemic halted global economic activity and decimated demand for crude. In order to maintain the level of crude oil prices during past year (2020) several members of Organizations of the Petroleum Exporting Countries (OPEC) curbed production. But with the recovery in global crude demand this year due to the rollback of pandemic restrictions, along with business reopening and climbing vaccination rates, members of OPEC group are now failing to ramp up output to meet soaring global fuel needs, therefore causing a gap in demand and supply side. Kazakhstan, Nigeria, and Angola are among the member countries of OPEC which couldn’t raise output. These countries are battling issues like under-investment, pending maintenance work, further delays due to the pandemic.

According to the IEA, oil output from non-OPEC plus countries is set to rise by 710 kb/d in 2021. Given the projected demand of 96.4 mb/d in 2021, there could be an output gap this year, which ultimately would cause further surge in prices.

Surge in coal and natural Gas prices

Rising prices of spot liquefied natural gas (LNG) and coal will support higher oil prices. Because of rising prices of natural gas users of natural gas will look for an alternative adding in the causes of increased demand of crude oil, which ultimately will results in further increase in crude oil prices.

Analyst Vivek Dhar, Commonwealth Bank commodities said in a note “Oil demand could pick up by an additional 0.5 million barrels per day, or 0.5% of global oil supply, as high gas prices force a switch from gas to oil consumption,".

Hurricanes Ida and Nicholas

Recent Hurricanes Ida in the Unites States disrupts offshore production. Producers has to shut down the offshore production for weeks because Hurricanes Ida and Nicholas damaged platforms, processing hubs, and pipelines. Hurricanes are continuing for a longer period than expected, again adding to the causes of increased demand supply gap of crude oil.

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