Black Gold Barrels Back: Oil prices rise to pre-pandemic levels
February 24, 2021
3 min read
What's going on here?
After hitting a historic low last year, oil prices have returned to pre-pandemic levels for the first time, increasing by 59% in value between November and February.
What does this mean?
Way back when lockdown began, oil prices plummeted along with global markets. The difference, however, is stock markets rebounded quickly whereas oil prices stayed low and at one stage went negative for some US producers. But, after hovering around $40 per barrel for most of 2020, the price of Brent Crude has recovered dramatically to $60.27 per barrel as of February 2021 – its highest since January 2020.
In part, these volatile price changes reflect oil’s inelastic supply, i.e. it is difficult to adjust how much oil is produced within a short timeframe. So when demand suddenly changes the price shifts sharply. But optimistic analysts believe this recent price rise signals good news. Since oil has derived demand from its use as a commodity in the functioning of the global economy, its price can be regarded as a macroeconomic indicator. Now, as the oil market is returning to normal, there is hope oil’s rising price forecasts a speedy economic recovery from the COVID-induced global recession.
What's the big picture effect?
However, it would be naïve to equate the recovery in oil prices with a return to normal times when there are many subtle influences behind the recent oil price rebound.
We must first appreciate the lingering uncertainty. It was unsurprising when oil recorded its lowest ever price per barrel as a result of the first lockdown given that most economic activity involving some form of crude oil crashed. But exactly how much oil prices will continue to rise is unknown. If vaccine rollouts enable the economy to reopen quicker than expected, there is concern that inflation will switch from perennial lows to uncontrollable highs, reducing the real value of money.
Yet, this inflation may not necessarily be accompanied by higher oil prices, which could stabilise at their current level. OPEC (Organisation of Petroleum Exporting Countries) will likely play a role here as the cartel controlling 80% of the world’s oil output. Indeed, it was Saudi Arabia and Russia’s decision to increase oil production that contributed to stock markets crashing in March 2020. Last month, Saudi did the opposite when it decided to cut output by 1m barrels per day beyond OPEC’s agreed supply curbs, creating a new scarcity that is forcing oil prices to rise again.
Finally, it must be observed that the individual share prices of oil companies are yet to pick up despite rising oil prices as the future profitability of suppliers remains in doubt. Lawyers advising oil companies may look towards long-term restructuring. Those wanting to diversify their product offering from an over-reliance on oil could look to energy alternatives, most notably renewables, such as Exxon who have announced a $3bn investment into “lower emission solutions”. This could involve acquisitions of small green-tech start-ups, or possibly mergers between existing producers in the hope of lowering costs via economies of scale.
So despite the return of $60 oil prices, it may be a while before other markets can enjoy the same pre-pandemic familiarity. Moreover, we should be more cautious than ever before in using oil prices as a barometer for the macroeconomy as a whole.
Report written by Seb Stacey
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