Brent, More Complex Dynamics

In our last update on oil prices, it was mentioned that “those who promote this view (oil at US$ 100) 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.” This primary view holds good even today, and this is the main reason for the rise in oil prices. But to make it more complex, the Russia-Ukraine stand-off, if it accelerates or if it prolongs, it will exert upward pressure on oil prices. There is a reported deal between Russia and China for supply of fuel to the latter so that China one of the largest importers and consumers of oil does not get affected due to geo-political tensions that are building up. It is a 10 Year contract for supply of oil and gas valued at US$ 80 billion. This is also viewed as a pre-emptive action to protect Russian interests in case of sanctions against Russia. The very fact that such an agreement is made points to the likelihood of adverse conditions building up in oil in the coming days. There are also reports in the media which highlights the extent to which some of the European banks have financed oil in the recent past, which may also be a reason supporting a build- up in oil prices. In any case Brent at US$ 96, seems to be poised to climb higher unless concerted efforts from oil producers is initiated to ameliorate the worries, and step-up supply.



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