Price of both oil benchmarks, the US West Texas Intermediate and Brent crude oil, closed on Friday down again, a decline for a sixth week in a row for the first time since November 2018.
Oil prices were hovering around the high $70s a couple of weeks ago. In October, Brent price climbed as much as $86 amid growing demand due to strong economic recovery globally and the limited production capacity of some of the Opec+ producers.
However, on Friday November 26, the oil market saw its worst sell-off in 2021 when the World Health Organisation’s warning about a new coronavirus variant, Omicron. It sent the prices down to $66 but they since crawled up to close above $69 on Friday, December 3.
Before the Omicron rout, Opec and its allies were under pressure from the US and other major industrial powers to increase production in order to ease the prices, which the US administration claims were fuelling unprecedented inflation in most of the western world.
Opec rebuffed those calls and maintained its plan to increase production by 400,000 barrels per day (bpd) every month well into the new year, a quantity the US says is not enough to ease the price surge. President Biden thus ordered the release of 50 million barrels from the US strategic reserve to calm the fuel prices in the US amid a significant decline in his approval rate. China plans to do the same very soon, most probably this month.
The release of the strategic reserve may have not impacted the price, but Omicron did, quite spectacularly. Analysts thus expected Opec+ to pause the production increase when the group met on Thursday. But the group surprised everybody by sticking to its plan of bumping 400,000 bpd more in January. The decision has put even more pressure on the price, which is expected to remain suppressed as more cases of Omicron infection are reported. Although Opec+ said it was monitoring the Omicron situation to see the new variant’s effect on demand, Brent lost $1 on Friday.
While the US and other major importers such as China, Europe and Japan, demand lower oil prices to keep inflation down, their economies seem to be bouncing back in rates not seen in more than two decades.
The inflation, as explained by many recently, is mostly a product of the supply chain dilemma, created mainly by the high demand of consumer goods vis-a-vis a slower rate of factory productions following a year of lockdowns and working from home. Retailers spiked the prices because of their limited supply amid a quickly surging demand.
It is thus unfair to blame producing countries or demand that they use their magic wand to reduce the prices. Years of attaching fossil fuel meant that less investment in oil production facilities, thus even if Opec+ wants to increase production there is a very good chance that some of its members just cannot do it.
Brent at $80 is a fair price. To sustain the post-pandemic recovery, oil at a fair price is key to global economic stability.
