Oil prices are on the move. Here’s what you need to know as an investor.
One of the biggest detriments to average consumers during the pandemic is that as more and more people get laid off, oil prices continue to rise fervently. In fact, average gasoline prices have climbed to seven-year highs, marking a turning point that could see more and more families exchanging their Civic for a Prius. However, some analysts are also wary that things could go either way, and a rise or plunge in oil prices could be equally likely. As lockdown restrictions worldwide fade to a close, there’s no telling where crude is headed as millions of people start to hit the road more often. Here’s what you need to know about these volatile oil prices.
Firstly, realize that demand for oil is finally coming back. Sure, during the start of the pandemic, global oil demand dropped fast, and quickly. People were in fear of the potential dangers from travelling, whether by road or by air, and thus the markets were completely thrown off. In response to this, oil producers slashed production, including a historic cut in output from a group of countries known collectively as OPEC+, which includes giants like Russia and Saudi Arabia.
Now, in a time where most developed countries have had significant success with vaccinating their populations, demand for the consumption of oil is coming back steadily. Whether it be commutes, air travel, or road trips, there are many factors that are now pushing fuel demand upwards. But the problem is, oil producers are still pumping less oil. Why is this?
A big reason for this supply-demand disparity is that OPEC+ has been extremely lax on putting barrels back on the market. This is likely an intentional ploy to keep prices high, which serves only to increase revenues for these oil-producing countries.
At the same time, U.S. and Canadian producers have also been pumping less than expected as their main priority is keeping share prices high, and keeping their investors happy. This is a huge surprise, as the Western producers are historically known for pumping exuberant amounts of oil when prices are coming back up from the downswing.
Last week, OPEC+ members got together for their monthly meeting, with the worldwide expectation that the members would gradually increase their combined output, but not to the point that prices would drop. However, what really happened was far from the case. The meeting quickly went south as the UAE wanted to produce more oil individually, to which Saudi Arabia opposed. This put things at an impasse with no timeline for when they would meet again.
As a result of these two crown princes falling out, the supply-demand imbalance is set to grow even more than expected. If the cartel can’t come to a conclusion, some analysts suspect oil to hit $90 a barrel, which could hit some industries such as airlines extremely hard. In a time when airlines are burning millions in cash every day, a rise in one of their key expenses is far from good news, and could certainly put some major airlines in jeopardy.
However, if the current drama caused OPEC+ to completely abandon their production cuts, there could be a free-for-all in the markets that causes a ton of oil to flood in, pushing prices down and would cause significant chaos for oil producers.
The volatility caused by these two stark extremes leaves even the most experienced O&G analysts puzzled, however we do know one thing is for sure. There is a ton of pressure for OPEC+ to reach a conclusion, as both a price spike and drop would be bad news for the members. Besides them, a price spike would be detrimental to many industries relying on oil, and would hit consumers hard as well.
As an investor, be prepared to see a shockwave effect from any sudden changes in oil prices reflected in other areas of your portfolio, with airlines, rail, and other transportation systems in particular. Keep a lookout with your oil stocks, and ensure you are comfortable with the current increased risk that has been posed.
Written by: Benny Fang
