The oil market took a big step up this week. Demand has risen faster than analysts expected. However, the turmoil in oil production is of greater significance this week.
The quotation for Brent oil has broken a psychological barrier. Monday, January 10, started hesitantly, with a quote of $81 per barrel. That's $1 lower than the closing price before the weekend. The market then shot up and two days later one barrel was $4 more expensive. On Friday, January 14, the barrier of $85 per barrel was broken and one barrel of Brent oil costs $85,23. That is the highest price since the end of October. The market has thus definitively shaken off the concerns surrounding the omikron variant.
The direct reason for the increased price is the rising demand and declining supplies of both crude oil and distillates. When demand increases, spare oil production capacity decreases. And that's something traders and analysts are starting to realize. OPEC is increasing production quotas, but it appears that members have been unable to fill them for months. Several African members lack the resources and money to increase capacity. Even Russia, which had to reluctantly agree to restrictions a year ago, did not fill the quota in December (according to provisional figures).
Theory versus practice
In a market with few reserves, relatively small disruptions (such as the unrest in Kazakhstan last week) can seriously unbalance the market. According to some analysts, Saudi Arabia and the United Arab Emirates are one of the few parties that can absorb a serious production cut. However, in calculations, many assume that the OPEC+ members have just about filled their quota. If this is not the case in practice, in combination with demand that is greater than expected in a month, this will quickly result in a tight market, resulting in rising prices.
Several experts warn that there will be little investment in fossil fuels in the medium term. Oil is mentioned in particular. The reserve capacity is used up without anything being added. We have recently seen on the European gas market that this can have unpleasant consequences for the economy.
Inflation in the United States
Although more distant, inflation in the United States is also causing oil prices to rise. This weakens the value of the dollar, causing the exchange rate to fall. Favorable for American companies that export, but less favorable for a country like Saudi Arabia. After all, that country has a 'hard' currency. Inflation is partly caused by the high oil price and that expensive oil in turn causes inflation, a spiral that some economists believe could continue until the end of this year.
The price of diesel has also risen this week. On Monday January 10, diesel cost €124,43 per 100 liters. That is €14 per 126,45 liters on Friday January 100. This means that the diesel price is approximately 30% higher compared to the beginning of January 2021. This includes the inflation correction of the excise duty. Crude oil rose about 55% from $55 to $85 per barrel during that period.