Between weak demand and tight supply

Oil is a sensitive commodity; only the fear or anticipation of something moves the needle up or down the prices. The past week brought volatility back with prices rising due to the giant container ship blocking the Suez Canal and the concerns over the supply tension that would be created till the dislodging of the blockage. But then there is demand constraint back again to reign in crude consumption. Oil prices are currently jittery – juggling between the fears of supply tightness due to the blockage in Suez Canal, and demand weakness arising from the third wave of Covid-19 and the ensuing lockdowns particularly across Europe and Asia.

Many are of the view that that it would take days if not weeks to clear the Suez Canal – one of the busiest shipping channels that carries oil and petroleum products among other products from Asia to Europe. In a Covid free world this would have created a shortage of supplies – which many are still highlighting. However, the tanker mishap in Suez Canal incident could also be said to have been overshadowed by the third wave of coronavirus-pushed lockdowns – a continuous signal during the pandemic for prices to spiral down due to weak demand. Thus, the tightening supply to Europe would be offset partially by the decline in demand over there. Its an interplay of short-term supply glitches versus long term demand destruction – which one of the two are more damaging is a simple guess.

And then the decision on production cuts by OPEC+ meetup in a couple of days will also keep prices balanced most likely as the group wouldn’t want volatility to rule. The global market is anticipating that OPEC and its allies will most likely maintain their production levels.

But the oil market and its drivers are capricious; in case the blockage of the Suez Canal extends beyond expectations, the shortage could increasingly show up in crude oil prices, which would not be good news for importing countries relying massively on imported petroleum products. Nonetheless taking such incidents out of the equation, the International Energy Agency in its recent analysis had pointed that the growing global thirst for oil shall continue.