Explained: Why oil prices are touching two-year highs


The Organisation of Petroleum Exporting Countries, with Saudi Arabia at helm and Russia as an ally (OPEC+) on Tuesday decided to continue unwinding steep cuts they initiated at the onset of the COVID-19 pandemic.

Explained: Why oil prices are touching two-year highs
Oil prices hit a two-year high as it went past $70 a barrel after OPEC (Organization of the Petroleum Exporting Countries) and its allies forecast increased output and robust recovery in demand in the United States and China, the world's two biggest oil consumers.
OPEC, with Saudi Arabia at helm and Russia as an ally (OPEC+) on Tuesday decided to continue unwinding steep cuts they initiated at the onset of the pandemic.
They intend to keep up their plan to gradually ease the supply curbs through July and increase the output by about 450,000 barrels a day.
Earlier in April, the group had agreed to increase the output by over 2 million bpd by the end of July.
The Energy Minister of Saudi Arabia, Prince Abdulaziz bin Salman’s statements after the meeting buoyed the market. He sees a demand recovery in China and the US in the coming months, he said, adding that vaccine rollout can help further rebalance the oil market.
The brent crude rose 1.3 percent to $70.25 a barrel on Tuesday, its highest close since May 2019. US West Texas Intermediate futures gained 2 percent to close at $67.72 -- a level not seen since June 2018.
“The market appears focused on the more constructive outlook for later this year. OPEC+ is of the view that the market will see significant stock drawdowns between September and the end of the year after,” ING Economics analysts noted.
A technical committee of the OPEC+ group said that the oil demand would jump by 6 million bpd in H2-2021. The current cumulative demand per day is 4 million barrels.
They further predicted that following the surge, global oil stocks will fall below their 5-year average (2015-2019 period), thereby dissolving the pandemic glut. Lower oil price will increase demand, and decrease the pandemic glut.
The demand for oil and other commodities follows the footprints of global economic activity. As the economies reopen after forced into lockdowns due to pandemic, demand for oil has also rebounded.
OPEC is betting on demand for more oil as the infection rates in much of Asia is in check. Oil demand in rich countries have also rebounded, plus, the encouraging vaccination numbers from the west have buoyed its hopes.
The group expects the global oil output to rise by 5.8 percent this year, the strongest since 1973, a WSJ report said. This expansion will also mark one of the most rapid demand expansions in the oil market in the last few decades.
The gains in the oil market were capped in the last two weeks due to the concerns of a possibility of Iran’s return to the oil market. Iran cannot sell its oil to the global markets due to sanctions imposed by the US after it walked away from the 2015 nuclear agreement.
The negotiations to get the sanctions removed are underway, but for now, they have hit a roadblock. If the US and Iran can agree, the latter may be able to make a comeback in the global oil market. If that were to happen, it would have been easier for OPEC to offset the rising demand as Iran could add 2 million bpd of oil to the market.
But OPEC Secretary-General Mohammad Barkindo is not worried. He said the return of Iranian exports “will occur in an orderly and transparent fashion” if a deal is reached, per a Reuters report.

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