Three factors behind soaring oil prices

Oil markets have stabilised as a result of voluntary restrictions imposed by Opec

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Published: Wed 29 May 2024, 6:20 PM

Last updated: Wed 29 May 2024, 6:21 PM

The current surge in global oil prices are mainly influenced by three factors — supply and demand dynamics, central bank policies, and geopolitical concerns. These variables are expected to continue to affect the energy market as the US presidential election approaches, so energy investors are advised to follow new events and stay informed about their potential impact, analysts say.

Oil markets have stabilised as a result of voluntary restrictions imposed by Opec and its allies on oil production. Since the third quarter of 2023, oil production has been cut by 2.2 million barrels per day. The aim was to prevent global oil production from exceeding global demand levels. As the virtual Opec meeting on June 2 approaches, just a few days ahead, market observers expect this voluntary cut in oil production to continue.

Contrary to preliminary projections, global crude oil demand did not rise as strongly as expected in 2024. “Supply constraints combined with a slow economic recovery and recovery from the effects of Covid-19 have contributed to some balance and there is an opportunity for experts to point out that global oil production will exceed economies’ ability to consume it, pushing oil prices higher and the complex overlap between supply and demand continues to be a critical element in this equation,” Mohamed Hashad, chief market strategist, Noor Capital, said in a note.

Crude oil production in the United States remains a concern. “Prices may be affected if supply continues to exceed demand due to surplus,” Hashad said. In addition, the start of the US summer driving season has led to higher enthusiasm in the market as many head to the roads for their holidays and travel, the demand for oil is expected to increase, he added.

Mohamed Hashad, Chief Market Strategist Noor Capital

Changes in crude oil prices are heavily influenced by interest rate dynamics. Historically, there has been a reverse relationship between oil prices and interest rates. The cost of borrowing rises when interest rates rise, which can reduce the pace of economic activity growth. Low oil demand contributes to lowering prices. On the other hand, low interest rates usually encourage economic expansion, increasing oil demand and pushing its prices upward, Hashad noted.

In addition, the weaker US dollar makes oil relatively cheaper for buyers in other currencies, increasing demand and pushing prices higher. Conversely, a stronger dollar could rein in oil prices.

Traders and analysts expect the current oil production cut to extend during the upcoming Opec + Group virtual meeting with a sensitive balance that supports prices without suppressing economic recovery. “It should be noted that Brent crude prices ranged in the range of $80 per barrel and Opec + aims to maintain them within the range between $80 and $90,” Hashad said.

Recent missile attacks from Russia on Ukraine and Russia’s plans to expand its border in the Baltic Sea have raised many concerns about crude oil supplies. Any interruption in oil production or transportation due to geopolitical tensions could lead to higher prices, Hashad noted.

The US Federal Reserve frustrated hopes for an early 2024 rate cut, boosting crude oil demand, pushing prices higher.

The US Dollar Index is approaching the level of 105.00 and positive US PMI data for May indicates continued economic growth and as liquidity returns to the dollar, oil prices rise, Hashad noted.

“Geopolitical tensions create uncertainty, affecting investment decisions and overall economic stability, especially in the Middle East, a source of significant quantities of oil. Higher oil prices can directly affect consumers through higher fuel costs, affecting families’ budgets,” Hashad said.