The price of oil had a spectacular comeback from the 2020 lows. Since April last year, when it settled below zero for the first time in history, it rose to $68 last week.
The move higher reflects the confidence in the world’s economic recovery and the higher demand for oil as the world fights its way back out of the recessions. Yet, the road ahead is full of uncertainty. As such, the price of oil could suffer corrections, just like it did last week.
Last week, the price of oil dropped over 7% on a single trading day. The move lower was triggered by fears of a rising dollar fueled by higher yields in the United States, but it also reflects fundamentals on the oil market.
Fundamentals on the Oil Market for Q2 2021
Global oil demand is on the rise as economies open up and the recovery pace intensifies. The supply, on the other hand, does not increase at a similar pace, fueling expectations of even higher oil prices in the future. The global oil supply dropped two million barrels a day in February after the cold weather in the United States affected production, and Saudi Arabia delivered an unexpected production cut of an additional million barrels a day.
The combination of the two led to the price of oil breaking above $60 in March, and it did not look back until it reached $68. No one envisioned such higher prices in only a few months since the year started, and the rally close to $70 triggered higher inflation expectations around the world.
Suddenly, central banks are faced with higher inflation prospects and thus pressured to move rates to higher levels. Accommodative measures are not justified if inflation is rising because most central banks in the developed world have an inflation-targeting framework.
OPEC’s decision in the second quarter will be key to the price of oil in the months ahead. For now, the cartel continues to restrict supply, but some changes in the policy are possible at the next meeting scheduled for April 1st. Despite the growing demand for oil, the market recovered only 60% of the volume lost in 2020.
To sum up, despite the recent move lower, the price of oil should find support on every dip. The global economic recovery, while ongoing, is far from reaching its pre-pandemic levels, and OPEC may decide to postpone production and benefit from the rising oil prices.