Tags: Commodity Market
Rebound in oil demand pushes the prices higher

Oil on the edge of the decade-high price of $100

The commodity analysts commonly believe that the oil prices will soon rise even higher due to the strong demand and shortage in supply.

There exists much discussion on whether the oil prices will climb higher or not. In this regard, Ed Morse mentioned earlier this week that even though the oil price rally may continue for the remainder of the year, the oil-producing might experience a boost in supply next year, as the US will probably have a substantial production growth. 

Not everyone shares this idea. Earlier this week, the chief economic adviser of Allianz and chair of Gramercy Fund Management, Mohamed El-Erian, warned against too much optimism in oil prices. He mentioned that high prices of oil would continuously put pressure on oil demand.

How did it come to this?

The current shortages in oil supply, according to the experts, are a result of two unforeseen circumstances. Firstly, the oil demand rebounded and recovered extremely quickly, so much so that the market didn’t adjust. Secondly, nobody had predicted the challenges in the energy transition. The limited horizon on the oil forecasters resulted in today’s energy crisis. 

El-Erian sees the price of $100 per barrel to be unlikely. The reason for which he explains to be one of the simplest market principles. The high prices will eventually turn down the demand. Therefore, if the uptrend in the oil market continues, the demand is soon expected to decline. 

The future level of supply plays a significant role in determining the oil prices. However, since the demand level remains uncertain, the giant oil producers refuse to change their production plans fundamentally. That is why OPEC had repeatedly ignored the US request to shift the oi production higher to meet the current demand. According to the latest Monthly Oil Market Report, OPEC has decreased its forecast on the level of this year’s oil demand by 160,000 BPD. Now the OPEC’s forecast on the yearly oil demand growth stands at a total of 5.7 million BPD.

OPEC has announced that it will cut down that oil demand forecast by a lot more for this quarter. OPEC believes that elevated energy prices will slow down the pace of recovery in 4Q21. However, the experts argue that the price-driven pressure on the oil demand is only one side of the coin. Supply, the other side of the coin, will also be determinant.

 

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