In-depth Analysis

What affects the current oil prices?

Russia’s move to invade Ukraine is shaking up the global financial markets. While stock markets tumble, Oil prices jump to an 8-year high above $100, with many investors wondering just how far prices can go.

And Oil isn’t the only commodity to surge – Aluminum, Gold, Palladium, European Gas, Nickel, as well as Wheat are all increasing in value, as investors worry about supplies from Russia and sanctions imposed by other countries.

The rising price of key industrial commodities is also adding pressure to the inflationary macro-economic environment of most Western economies, which in turn could pressure central bankers to raise interest rates faster than expected.

Brent Crude Oil reached $100 a barrel for the first time since 2014

Oil prices have sharply increased since the market dip of March 2020 when Oil prices tumbled below $30 a barrel due to Covid-19. With fears over a Russian invasion of Ukraine elevated since the beginning of the year, the Brent Crude index steadily rose and reached its highest level above $100 this week for the first time since 2014.

The million-dollar question now is whether or not Oil prices will keep rising…

One should note that this market is a volatile one and as long as Russian/Ukrainian tensions remain high, it will disrupt the global Oil offer, which will certainly make Oil prices rise over the short term.

Military tensions in the East are currently disrupting the Oil market for two main reasons: 1) Ukraine acts as one of the most important transit countries for Oil and Gas distribution in Europe, and 2) punitive sanctions against Russia might strongly impact business, economical, as well as financial transactions between Russia and the rest of the world, and keep tightening the available Oil supply.

According to the 2021 BP Statistical Review of World Energy, Russia produced 10.66 million barrels per day (bpd) in 2020, with the other two major Oil producers – the United States and Saudi Arabia – producing 16.48 million and 11.04 million bpd respectively that same year.

No major Oil production increases expected – What about Oil demand?

The level of production from major Oil producing countries has been supporting Oil prices in recent months, as analysts and investors aren’t expecting any major production increase this year from the OPEC countries. Moreover, Oil is a scarce resource. In addition, fewer new oil rigs are being discovered, and limited investments are being made to substantially increase output, which should lead to a reduced supply over time.

What about Oil demand?

As most economies are opening up with an increasing number of people getting vaccinated, as well as the fact that the global economy seems to be recovering, Oil demand is expected to continue rising in 2022. It should even reach pre-pandemic levels and higher in 2022. The International Energy Agency (IEA) estimates that demand could reach 99.7 million barrels per day.

The relationship between supply and demand is what mostly dictates the trajectory of Oil prices.

As the law of supply and demand affects the price of a resource, when supply slows down or stays static, but demand increases, then prices tend to rise. On the other hand, if supply remains unchanged or increases, but demand decreases or remains the same, then prices tend to decrease.

Therefore, it is likely that supply will be unable to keep up with demand over time, supporting higher oil prices over the long run. Global Oil inventories will also likely change as a result.

What other factors can influence Oil prices?

There are some other factors that can impact commodities prices, such as:

  • value of the USD, as most commodities are libeled in American Dollars
  • global economic health
  • regulation, international sanction, government decision, trade war
  • extreme weather events, strike, war
  • changes in consumption habits

2022 is probably going to be a volatile year for the markets, seeing the end of cheap money and low inflation. With so many uncertainties though, it is difficult to predict exactly where Oil prices are going and how they will be impacted by so many changes, but this uncertainty may very well trigger great trading opportunities for those willing to take advantage of them.

 

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