The price of crude oil reached a 32-month high after Brent crude rose by 0.6 percent to $73.29 a barrel on Monday. This is the fourth consecutive session where prices of crude rose consistently. The rising crude oil prices are expected to further increase petrol and diesel prices, which are already sky-high.

Why are the prices of crude oil rising?

The rising price of crude oil can be explained by a simple economical theory — demand and supply. Prices of crude oil have been steadily rising through the start of 2021 when Brent crude was trading for nearly $52 a barrel.

The resumption of various economic activities across the world, along with hopes of further recovery boosted demands for crude oil. At the same time, supply was short as oil-producing countries made drastic cuts in 2020 when crude oil was being traded in the negative.
The current supply is having a hard time keeping up with the demand.

In its monthly report for June, the Organisation of Petroleum Exporting Countries (OPEC) stated that it expects global crude oil demand to average 96.58 million barrels per day in 2021. In 2020, the number had fallen to 90.63 million bpd. The demand is set to increase only further in the second half of the year, it said.

Meanwhile, the International Energy Agency has asked leading oil producers to “open the tap” to keep the world well supplied, Financial Times reported. The IEA predicted that the demand for oil would surpass pre-pandemic levels by 2022. The OPEC+ group (Organization of the Petroleum Exporting Countries) is expected to increase total production by 2m bpd between May and July.

“Additional supply from OPEC+ will be needed over the second half of this year, with demand expected to continue its recovery,” ING Economics said in a note cited by news agency Reuters.

US crude oil production also increased to a high of nearly six months amid the surging demand.

Where does Iran come in?

Iran is one of the major producers in the OPEC group but currently cannot export most of its production due to sanctions from the US.

The sanctions were imposed after the nuclear deal between Iran and Western nations fell through during the Donald Trump presidency. While talks are continuing in Vienna between Iran and US, the likelihood of US rejoining the nuclear deal in the future remains low.

As such the surplus supply from Iran is not expected to hit the growing demands of the market anytime soon.

This has led to speculators driving the rally of WTI crude to a 32-month high. “As a result, speculators have increased their combined WTI and Brent long to a five-week high with inflows skewed towards WTI where the net long reached a near three-year high. Brent’s next upside target is $75.6 followed by $78, the downtrend from the 2008 high,” Saxo Bank said on the matter.

What does this mean for India?

The rising crude prices have resulted in price hikes for petrol and diesel in India. Prices for both fuels have reached over Rs 100 in various parts of the country. Even so, officials at oil marketing companies (OMCs) have maintained that the current record-high prices are lower than what refiners should be charging if they were in line with international rates.

With prices of crude oil unlikely to fall anytime soon, without a cut on levies for petrol and diesel, the price hike of auto fuels will continue to increase.
Source: CNBC TV18