Supply problems and rising demand have kept global oil prices above $100 for the past 7 weeks. Restrictions on Russian oil and the inability of major producers to increase production have affected world oil markets due to reduced oil supply. Russia’s participation in the global oil market is huge. Russia is the world’s third largest oil producer behind the US and Saudi Arabia. Russia is also the largest exporter of oil to world markets. After their invasion of Ukraine, many countries blocked imports of Russian oil, gas and related products. These measures have sent panic into global oil markets.
Production control
Oil has also been affected by OPEC-affiliated production restrictions. OPEC member countries including Russia produce 40 percent of the crude oil required for the global market. Through their collective effort, they can produce enough oil and lower the price. Among the OPEC countries, Saudi Arabia and the UAE are the only two countries that can produce more than the specified amount of oil. But despite repeated requests from the US and the UK, they are not ready to increase production. Non-OPEC countries, on the other hand, are struggling to maintain production due to insufficient well maintenance and lack of capital.
Covid and oil
Oil prices fell in 2020 due to reduced demand due to the shutdown due to Covid. OPEC members cut production by 10 million barrels per day to support prices. Production has gradually increased, but oil is still being produced 2.5 million barrels less than before the pandemic. Crude oil production from the world’s largest oil producer, the US, has been at a standstill for the past few months. According to US EIA estimates, US oil stocks have drawn heavily due to increased summer consumption.
The tightening of monetary policy by banks and the invasion by Russia have raised the threat of inflation and affected economic activity around the world. With the official embargo against Russian oil in place and OPEC member countries unwilling to increase production, global oil prices are likely to remain high in the near future. But a strong US dollar and tight monetary policy by central banks will prevent prices from going much further.
The writer is Head of Commodities at Geojit Financial Services