Should You Consider Investing in Oil Amidst the Pandemic?

The oil price has seen a rebound in recent days reaching the highest price since October 2018. The price topping $75-a-barrel has analysts believing that the price will remain under the pre-pandemic rate possibly until 2023.

The economic uncertainty and downturn caused by the pandemic affected the supply and demand for oil in the short term. Prices were weak at the time of the outbreak and dropped further as news of those affected by the virus spread.

Less construction in China, low economic sentiment globally, business disruption, limited tourism and international air travel lead to cuts in production. With Chinese production levels and imports dropping, jet fuel demand plummeted. Prior to the pandemic, China made up about 12% of consumption, at 1 million barrels a day in jet fuel. Without storage space to store reserves, and less demand it was deemed necessary to slash supply. In an attempt to do so, a price war between Russia and Saudi Arabia transpired but both countries eventually agreed to oil production cuts.

The Organization of the Petroleum Export Countries known as OPEC came into existence in September 1960. An agreement was signed by Iran, Kuwait, Iraq, Saudi Arabia, and Venezuela as its members. OPEC influences oil prices as it coordinates its member countries’ petroleum policies to secure regular supply to consumers. It also ensures that producers earn a fair return and a stable price to the global oil market. Today, OPEC includes 13 member countries with Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Libya, and Nigeria, making up the initial membership. The United States, China, and Russia follow objectives not set out by OPEC as they are not included in the organization.

The slow return to business as usual

With the rollout of vaccines against the virus, easing of lockdown restrictions and some countries falling into the green zone and opening their doors to tourists in Europe, demand has started to increase resulting in a 2% increase in oil prices this week. Suppliers are dipping into last year’s stored inventory. The OPEC members are sticking to the promised schedule, with a more prudent approach however, Russia and Kazakhstan would like to escalate supply up to September 2021.

There are, however, a number of factors that could limit the present rally. The new strain of the virus, the Delta variant, is driving some countries into limited lockdown and slowing business activities. Some OPEC members believe that supply restraints should be throttled until next year. Further, there are nuclear talks between the US and Iran to lift sanctions. A successful agreement could result in an influx of oil supply.

Many analysts have shared the bullish opinion that the price of oil will climb higher, heading towards $100, however more conservative analysts believe that the price will trade between $75-$80 until mid-2022. At this stage, it all depends on demand-led requirements as the 45% year-on-year increase has shown us.

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