Crude oil prices have soared in the last few days. Let’s uncover the reason behind this sudden surge!
A few weeks ago, we saw the oil price plummet to its lowest in 15 months to $71 per barrel, causing panic among investors. But now, a surprise announcement of a production cut by OPEC+ has turned the tables again.
Let’s find out more about it.
What’s Happening?
The end of China’s Zero-Covid Policy in December 2022 was a game-changer for China and oil investors. As the world’s second-largest importer of crude oil, China’s decision to reopen its economy was expected to increase its oil demand.
This news prompted traders to take risks by placing speculative long positions in crude oil futures, because of which the oil prices surged to $88 per barrel. This means they were betting that the oil price would increase and hoping to profit from it.
Cut to March 2023, the oil price took a nosedive, hitting $71 per barrel, the lowest it had been in 15 months. The instability of the US and Europe’s banking industry was the main culprit behind this sharp decline. The ripple effect of this banking instability was spread to the oil market.
Because of the banking crisis, hedge funds aggressively sold off their long positions in oil, predicting that prices would decrease in the short term. This contributed to the sharp decline in oil prices.
Huge Oil Inventories
Oil demand was falling faster than what the markets had anticipated. In fact, according to a report by the International Energy Agency in March 2023, global oil inventories reached an 18-month high in January and stayed that way throughout February 2023.
So, Why are we Experiencing a Price Surge in Crude Oil Now?
On Sunday, 2nd April 2023, OPEC+ (a group of 23 oil-exporting countries) met and announced that they were expanding crude oil production cuts to 3.66 million barrels per day, accounting for 3.7% of global demand, according to a report by Reuters. This was done to maintain stability in oil prices.
As a result of this unexpected decision, oil prices surged by $5 per barrel, bringing it above the $85 per barrel mark.
What’s Next?
According to the Times of India Report, this crude oil production cut has dashed hopes of falling oil prices and renewed fears of further inflationary pressure amid lingering recession worries globally.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
