Brent has shot up, through the US$ 70 per barrel, and it looks set to rise more. The recent rise in the prices, in the last few days, has more to do with the attack on the oil facilities of Saudi Arabia by some terrorist groups. The damages caused to the Saudi facilities is quite extensive, but the impact of this event on prices may not be very deep compared to the other factors that are at play. The general direction of rise in prices has been expected widely by analysts across the continents due to several factors. The most prominent factor is the output restrictions by OPEC + and more conspicuously by Saudi Arabia. These output restrictions were further reaffirmed by Saudi and OPEC+ once again recently. The fall in the US inventories of crude is also a factor which has caused some nervousness at the marketplace. The winter is comparatively stronger and the demand for fuel for heating devices is something that has put pressure on the price level. Yet another factor that has been supporting higher oil prices is the rebound in economic activity that is witnessed across economies mainly on account of lower interest rates and liquidity expansion.

There is enhanced optimism about the oil economy consequent to the further economic stimulus in the US as also Europe which could put more money in the hands of the people and could push up spending, and consequently oil demand too. The demand from countries like India, China and East Asia is likely to rise in the coming months in the opinion of major oil market participants. In fact, one of the projections puts the growth in per day oil demand to be to the tune of 5 mio barrels. The vaccination programme and the consequent ability to travel far and wide coupled with rebound in economic growth is likely to bring in greater optimism in people, and travel both local and international, in all major modes is expected to rise.

A sustainable challenge to the rise in prices is the probability of the second wave of the pandemic creating major issues at different places around the world where there is progressive lockdowns due to rise in infections. This could be a likely scenario in some parts of Europe where there are lockdowns and the access to vaccine is also severely restricted due to the non-availability of vaccine dosages in sufficient quantity. This may take a long time to get into resolution. Another major challenge would be the progressive introduction of electric vehicles and the use of alternate energy sources which is catching up, and which could eat into the market for oil in the coming decades.

The rising oil prices is in itself a cause for inflation in some of the major importers of oil and this may have some impact on the trajectory of the overall price level, and therefore, central bank policies on base rates. A rise beyond US$ 70, and possibly US$ 80, could upset many economic calculations.


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