As we enter the last quarter of 2023, it is interesting to observe that crude oil prices have been grabbing headlines once again. After experiencing 11-year high in 2022, the year started with the energy product commencing trade at $80.40 per barrel. In the initial few months until May, the prices treaded a bearish trend with the value slumping to $63.69 per barrel. However, since June, the price increased reaching the highest at $95.02 per barrel (the highest since August 2022). The prices have breached the $90 per barrel for the first time in a year and market analysts opine that there are no signs that the rise is slowing down.
While the increasing prices is a welcome relief for bullish traders, the rise in the price would negatively impact consumers, especially on gasoline and transportation costs. Although the US Federal Reserve’s rate hikes have helped curb inflation effects, the other factors like oil supply dynamics are uncontrollable. In hindsight, increasing oil prices put the Fed’s attempts to trigger a soft landing for the economy in jeopardy. Hence, the million-dollar questions are what are the driving factors behind the rise and will the prices return to the $100 per barrel mark?
Pandemic Equation
Before the Covid 19 pandemic hit the news and influenced the global economy, prices mostly traded between the $50-$60 per barrel range for most of the year. When the pandemic hit the global economy in early 2020, lockdown orders negatively impacted oil demand, plunging prices to all-time lows. As a result, US oil production numbers fell three million barrels per day. However, as the lockdown restrictions eased and normalcy returned, demand rebounded faster than expected while supply lagged. This imbalance in the demand and supply equation sparked a climb in oil prices that lasted for the next two years.
Russia’s Invasion of Ukraine
After Russia invaded Ukraine in February 2022, many countries banned Russian oil imports in retaliation. However, removing this vital supply source strained the markets, propelling oil to break the $100 per barrel mark in the ensuing months of 2022. In response, the US released a record amount from their Strategic Petroleum Reserve (SPR) thereby boosting supply albeit temporarily. As per the figures, between the start of the invasion and now, 235 million barrels of oil have been released from the SPR, accounting for 40% of pre-invasion levels. This has apparently pushed oil prices back below the $100 per barrel mark. Subsequently, prices fell below $70 per barrel in the early half of 2023. But the SPR release was a risky strategy, simply because OPEC member nations could simply cut off production to compensate for the increase in supply from the SPR. And, that’s exactly what they reverted to.
OPEC+ Production Cuts
OPEC+ member nations responded by cutting production to compensate the release of the SPR by the USA. Russia and Saudi Arabia reduced output significantly, slowly tightening supplies again. Their recent announcements to continue with the decision through 2023 surprised the markets with prices rallying further. The major oil-producing economies will always work in their best interest and that involves pushing oil prices high without hindering the global economy and sparking the next global recession. Also, the devastating floods in Libya, one of the top 20 oil producers in the world, has prevented the export of oil to the global markets.
Supply Side
The US productions have continued to escalate and will almost inevitably set a new record for this year. But supply has not been enough to stay ahead of the rising global demand in combination with production cuts from OPEC+ member nations. The other significant factor is that we are heading into lower-demand season in the US. Combining this with the rising US production will likely keep the US market well-endowed.
Limited Alternatives
The Biden administration has limited alternatives to rescue itself from further oil price spikes with the SPR now severely depleted after record releases. If Saudi Arabia and Russia want oil prices to rise above $100 per barrel, it will only hurt President Biden’s chances as he heads into election year.
Conclusion
OPEC+ supply reductions are the primary accelerator behind the renewed oil price momentum nearing the $100 per barrel. If member nations do not change their stance, oil prices may continue to rally presenting challenges to contain inflation pressures and economic stability for the US and other economies around the world.
