Oil prices are moving in all directions. The upward trend of one week earlier was continued in the first half of the week. That price increase was completely surrendered later in the week. How do we get the oil market back under control?
The quotation of Brent oil came close to the record level of 2008 this week. On Tuesday, March 8, the quotation closed at $127,98 per barrel. The rise in oil prices was rapid, but the fall was even faster. A spread of more than $25 per barrel, as occurred on Wednesday, March 9, is unique. At the peak the price was $131,64 per barrel and at the bottom the price was $105,60 per barrel. The drop of more than $16 per barrel in one day is also steep. The price is now stabilizing somewhat, as it stood at $10 per barrel on Thursday, March 109,33.
The price increase is reminiscent of the 1973 oil crisis. However, that comparison is largely flawed. At that time it concerned a targeted boycott of Arab countries to target Western powers for supporting Israel in the 'Yom Kippur War'. Now it concerns the partial loss of oil from Russia due to sanctions against the country. US President Joe Biden reports that the United States will no longer purchase Russian oil and gas at all. Given the small share of the American market, this is a step he can take without plunging the country into crisis. Incidentally, it is not the case that American citizens do not notice the boycott, petrol prices are also rising there.
This is more complex for the European Union. We are largely dependent on Russian oil and gas. There is therefore room in the sanctions to allow trade to continue. The Kremlin's attitude is at least as relevant. Putin has not imposed a blanket ban on oil and gas exports to the West, following Western sanctions that have seriously disrupted the Russian economy.
How do we get the price back under control?
According to experts, the extreme price movements can partly be attributed to speculators. When a market is as volatile as the oil market has been this week, there is a wealth to be made (or lost) for speculators in a short period of time. This attracts fortune seekers, causing extra money to enter or disappear from the market. Countries such as Saudi Arabia and the United Arab Emirates still have considerable spare capacity to increase oil production to pre-corona pandemic levels. This will allow the countries to increase their market share and calm down the market somewhat. Whether these countries dare to take that step is still uncertain.
Another option that is increasingly being put on the table to further calm the oil market is normalizing the United States' relations with Iran and Venezuela. Iranian oil production is about half compared to the period before the American boycott and Venezuela is at about 33%.
Danger lurking
The high oil prices also pose a danger to oil producers. If the price rises too quickly and too large, the demand (growth) for oil is slowed down. The high oil price is also a driver of inflation. Inflation has already been at its highest level in decades in recent months, but this will only get worse with the current energy crisis. This damages economic growth and therefore the demand for oil. A final point mentioned by many is that high energy prices are an incentive for sustainability. How companies and private individuals shape this varies from situation to situation and sector to sector, but it has direct and/or indirect consequences for the demand for oil.
The price of diesel is closely following that of crude oil. The diesel price for deliveries from 4.000 liters peaked on Wednesday, March 9, at €194,60 per 100 liters. An absolute record. On Friday, March 11, the price is €151,70 per 100 liters. This is a significant drop compared to Wednesday, but still approximately €20 above prices in January, when the diesel price was also relatively high.