Brent, Being Pulled From Both Ends

Brent is back at higher levels, US$ 86.50, and the forecasts have come up that it may now touch US$ 100. Those who promote this view pin their hopes on the limited capacity which OPEC + may have in expanding the supply, and this dead end may trigger a surge in prices. There is also a talk of structurally bullish phase emerging in oil, which may carry on for a few years to come. Much of this thinking is premised on the fact that OPEC+ capacity or potential for expansion of production will be highly limited, and this may in the medium to long term trigger price rise unseen in the last few years. On the supply side, expansion in supply by major oil producers is also slow at this time, and it is expected that it will continue to be slow, and therefore, supply will be less than optimal levels. On the demand side, oil demand is already very much at pre-pandemic levels, and the prices could give a surprise on the upside. Also, adding to the trend is the transient phase of weakness in the US Dollar against the majors like Pound Sterling and Euro, and this also may have helped oil prices to move up. The Omicron variant of the pandemic is not expected to alter the demand scenario much, and it is a weaker variant and therefore, may not cause any major disruptions in demand. The International Energy Agency has put it as, “milder than expected demand disruption.” Oil futures have moved up broadly indicating or pricing in the likelihood of higher prices in future. Higher oil prices have twin impact for some of the major oil importing countries like China and India. This may have adverse consequences for the domestic price level, and higher inflation may gradually eat into the buoyancy in consumption demand which propels these economies and their growth. This may also have consequences for local currencies with import bills ballooning over time.



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