Oil markets have been on a roller coaster this year, with prices recovering moderately in January, only to decline to half their levels in March. Oil’s dramatic plunge didn’t stop there as the coronavirus pandemic battered demand.
A key benchmark, the West Texas Intermediate – a blend of US crude grades – took a dive below zero on April 20, trading at -$40 per barrel at one point below. The month, which saw the severest mobility restrictions globally, to counter the coronavirus outbreak was described as ‘Black April’ by Fatih Birol, executive director of the International Energy Agency.
With ground and air transportation at a virtual standstill and people confined to their homes to limit the spread of the virus, the price of oil was close to being worthless, endangering tens of thousands of jobs that depend on vital sector.
However, WTI took a 360 degree turn in today’s opening session, rising to above $40 per barrel after Opec+ extended its 9.7 million barrels per day curbs by another month. Here’s why oil remains so volatile and the factors behind its ebb and flow.
Demand-supply fundamentals
The biggest determinant of oil prices today is the mismatch between demand and supply. The 2014-16 price crash exposed the glut in the market from the spectacular increase in production from the US shale basins. At the same time, demand in many of the developed economies peaked. However, the developing world, led by the rising economies of China and India continue to drive crude demand growth.
With growth in China set to moderate and Beijing and New Delhi looking to add more electric vehicles on the road, their continued demand for more oil is expected to peak as well.
“Oil prices compared to other commodities are more volatile because there is much uncertainty on the supply and the demand side of oil,” said Garbis Iradian, chief Mena economist at the Institute of International Finance.
While supply corrections are already underway by way of an historic output cut pact endorsed by Opec and producers outside the group, there is still much uncertainty left in the markets.
“When we approach November-December, some experts say there could be higher cases of Covid-19. But overall, the second half of this year will be much better than the first half, so there is much uncertainty, and when you have a lot of uncertainty, [you have] volatility,” said Mr Iradian.
Technology and shale’s rise as swing producer
The rise of independent shale producers in the US heralded a new dawn for oil. Gone were the days when the markets worried about the stability of oil production in the Middle East and the various geopolitical risk factors associated with it.
Shale, proved far more responsive to oil’s fluctuations, with drillers adapting to the market environment by innovating new technology to help ride the storm in prices.
Amit Bhandari, a fellow of energy and environment studies at Mumbai-based think tank Gateway House, credits the evolution in upstream technology, notably, hydraulic fracturing behind its…
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