Why Oil prices are at a 7-year high. All you need to know – BusinessToday

Clipped from: https://www.businesstoday.in/latest/economy/story/explainer-why-oil-prices-are-at-a-7-year-high-all-you-need-to-know-308643-2021-10-06

A sharp cut in capital expenditure by oil companies, along with gas scarcity in Western Europe are some contributing factors, analysts say.

In 2020, when the Covid-19 pandemic brought the global economies to a screeching halt, the economic activities and the oil demand was at its nadir. Photo: ReutersIn 2020, when the Covid-19 pandemic brought the global economies to a screeching halt, the economic activities and the oil demand was at its nadir. Photo: Reuters

The oil prices are trading at their highest level since 2014–thanks to the low supply, and quicker than expected recovery in the oil demand. The Brent was last at $82.47 per barrel on Wednesday morning and WTI was at $78.84. The prices rose to a multi-year high after OPEC and Non-OPEC members–collectively referred to as OPEC+–on Monday decided to stick to its plan of gradually increasing the oil output. In the meeting held on Monday, the members of OPEC+ decided to go by its July decision of boosting oil output by 400,000 barrels per day each month until at least April 2022. 

The oil cartel (OPEC) was witnessing huge pressure from some countries to increase oil output substantially, as economic activities across the world are picking up sharply, leading to a strong demand for oil. India, one of the largest oil consumers, had also pushed for OPEC to consider more supply to ensure comfortable prices both for consumers and producers.

In addition to increased demand, the skyrocketing prices of gas, which has spiked over 300 per cent, is exacerbating the situation. The spike in gas prices is prompting many countries to switch to fuel oil and other crude products for all industrial needs, increasing the global demand for oil.

In 2020, when the Covid-19 pandemic brought the global economies to a screeching halt, the economic activities and the oil demand was at its nadir. But now, with the dip in Covid-19 cases, the process of vaccination has boosted the sentiment in the market and the demand for crude oil is bouncing back. However, many analysts are attributing environmental, social and governance push, a sharp cut in capital expenditure by oil companies, gas scarcity in the Western Europe, and a sharp spike in gas prices as some of the factors that are leading to this crisis.  

“The required investment and capital expenditure into the oil and gas sector have not happened as many companies decided to keep their capital investment and Capex on hold. Some companies invested funds earmarked for expansion into oil and gas into the renewable sector,” said Narendra Taneja, chairman of the Delhi-based Independent Energy Policy Institute.

Also read: India to soon introduce flexible fuel vehicles to increase ethanol use

Is $100 per barrel a possibility?

Yes, the experts believe that starting from here, the price of oil is only going to march ahead. Taneja believes that if we get the desired results out of the ongoing vaccination process across the world, the prices of oil are bound to go up. He believes with the vaccination reaping desired results in economies like the US, India, Europe, etc, the oil prices will witness a spike.

“As far as my viewpoint is concerned, I think in this Winter the oil prices would be under tremendous pressure. And oil may stabilise in the range of 80 dollars per barrel through this winter,” Taneja said.

According to him, in 2022, the price of oil is going to go only in one direction that is north and in 2023, oil prices are going to be in the range of $100 per barrel on a sustained basis.

Prashant Vashisht, vice president, Corporate Ratings, ICRA, throwing light on the prices of crude oil said, “Over the longer term, oil prices are expected to have a northward bias due to lower capital spending by upstream companies, including shale companies. However, over the near term, oil price levels would critically depend upon the production and supply levels of OPEC+ and the global demand growth.”

Also read: Cairn to produce India’s 50% oil, gas in 2-3 years: Anil Agarwal

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