July 31, 2021

Oil prices have been projected to hit $120 by the end of this year as they are expected to amass some 40 per cent increase from its recent levels. This is despite the crude losing more than 8 per cent of its prices this month.

But further gains in oil prices are threatened by the strength of the United States dollar, which appears to be an obstacle to the fortunes of the crude.

According to a report published by MarketWatch, a subsidiary of Dow Jones & Company, investors have been put on notice of the possibilities of the oil prices shooting up to $120 before the end of the year. Dow Jones & Company is a property of News Corp, which also owns The Wall Street Journal.

Only last Wednesday, crude oil prices rose for a second day after data showed US crude inventories fell more than expected, easing worries about oversupply that have dogged the oil market in recent weeks.

Following the drop in the US inventories, the global benchmark Brent crude rose by 40 cents, or 0.55 per cent, from 73.43 per barrel to $73.84 per barrel, after gaining 0.5 per cent on Tuesday.

The US West Texas Intermediate (WTI) crude also rose by 20 cents, from 68.52 to $68.72, having risen nearly one per cent in the previous session.

OPEC, along with non-member allies including Russia, last month struck a deal to curtail some of its production cuts, to the extent that they would increase output by one million barrels a day. The move, in a way, was meant to offset supply losses tied to economic woes in Venezuela, disruptions in Libya, and renewed U.S. sanctions on Iran.

However, the decision by major oil producers to lift output didn’t cause a drop in prices—instead, they climbed shortly after the decision, with U.S. benchmark West Texas Intermediate crude futures on June 29 settling at $74.15, their highest since November 2014.

Recent tweets from President Donald Trump had also called for Saudi officials to pump more crude and lower prices. It’s “very new and very unusual for a sitting president to be able to…comment on OPEC or oil prices to a degree where we see his tweets have an actual impact on the price” of oil, said James Bambino, managing director of the Oilgram Price Report at S&P Global Platts.

But the most important factors influencing prices are supply and demand, he pointed out. The market may see a fall of $10 because of the tweets, but part of that drop would be attributable to “indications that foreign policy will have a longstanding impact on supply-and-demand factors,” said Bambino.

The IEA forecasts that global oil demand will grow to 100.5 million barrels a day in 2019, from 99.1 million this year.

There is a bit of a feedback effect at hand as well. As the Fed tightens rates and pushes up the dollar, emerging market currencies suffer from sudden shocks, sometimes severe. Argentina, Brazil, Turkey and South Africa have seen significant depreciations in their currencies this year. As capital flees some of these emerging markets and flows into safe haven assets, such as the U.S. dollar, it only magnifies the divergence between the greenback and other currencies.

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