Oil Prices Surge: Supply Cuts and Geopolitical Tensions Take Toll

10 Apr 2024 , 10:54 AM

Recent weeks have seen an increase in oil prices due to worries about supply and geopolitical dangers, such as hostilities in the Middle East and Ukraine. The momentum, according to analysts, might push prices upward.

Since mid-December, the price of a barrel of Brent crude oil—the global benchmark—has increased by more than 20%. It has increased to almost $90 per barrel, a gain of more than 10% in just the last month.

Increasing oil costs may complicate central banks’ efforts to lower inflation. In the US, the Biden administration—which is headed into a challenging election in November—would likewise dislike higher petrol costs during the summer driving season. The Energy Information Administration reports that since early January, the average price at the pump has increased by around 50 cents to $3.70.

Market observers point out that following such a sharp increase, a brief price decline is also conceivable. Additionally, the price of oil is still lower than it was in 2022, when it spiked well over $100 per barrel.

The world’s top oil producer, the United States, and other non-OPEC nations saw rapid increases in their crude output in 2023, which gave investors confidence that there would be sufficient oil supply to meet demand. Throughout the majority of the year, prices were low despite the risks posed by geopolitical unrest. At first, markets mainly ignored the dangers presented by the war between Israel and Hamas.

However, 2024 appears to be a quite different year. More than some analysts had predicted, demand has exceeded supply. In addition, a number of possibly upsetting incidents as well as production reductions by Saudi Arabia and its allies have stoked concerns about a possible supply shortage.

The most disturbing event occurred on April 1 when an airstrike near Damascus, Syria, killed a group of commanders of the Iranian Revolutionary Guard. Fears that Iran’s actions may include important Persian Gulf exporters in the conflict—which started with the October attack on Israel by Hamas—grew when Iran threatened to react.

According to Reuters, the Middle East crisis hasn’t had much of an impact on oil supplies, but markets will remain nervous until they see how Israel and Iran resolve their differences.

The ongoing efforts by the OPEC+ group of oil producers to restrict oil supplies contribute to the unease. These production cuts, which are largely the result of the work of Prince Abdulaziz bin Salman, Saudi Arabia’s oil minister, are taking about 5 million barrels per day—roughly 5% of the market’s supply—off the table.

Although it is always doubtful that OPEC will honour its agreements, the markets are starting to realise that unless prices increase significantly, these cutbacks may not be eased anytime soon.

When OPEC+ officials meet in Vienna early in June to discuss how much oil to supply the market, tensions may reach a breaking point. Analysts predict that while some group members would favour higher production, the Saudis will probably push back.

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