Oil Prices Rising: factors, implications, and near-term prediction

By

Victor Igono

Date Published

June 4, 2021

Category

Insight

Oil prices hit a two-year high with the global oil-price benchmark closing at $70 per barrel. This was in reaction to the optimistic outlook reported by OPEC’s technical committee[1]. The recent surge in demand stems from increased economic activities in the USA and Eurozone, especially following a widely successful COVID-19 vaccination campaign. This reduced the need for strict lockdowns which had hitherto grounded economic activities in many parts of the world.

What implications will this have on the global economy?

The recent surge in global oil prices can either be a boon or a source of worry for countries across the globe. Net energy exporters stand to gain from the current trend since it provides national governments with much-needed revenues and foreign exchange, especially after a year of price glut and significant spending in response to the pandemic. However, net energy importers face the prospect of a relatively higher inflation rate as surging commodity prices increases manufacturers’ cost of production. This could hamper manufacturing activities as well as worsen the plight of consumers.

In contrast to the above distinction, Nigeria occupies a curious position. As an energy exporter, the country stands to benefit from the recent surge in prices. This is especially important considering the disproportionate role of energy revenues in the country’s fiscal and monetary policies[2]. Nonetheless, the country’s reliance on imported refined petroleum products as well as other key items like food products could reverse the gains from high crude oil prices.

Short Term Predictions

The recent surge in prices already incorporates all available vital information. However, a few uncertainties remain. Foremost, the ongoing talks between Iran and the USA regarding the JCPOA nuclear deal could swing prices either way, depending on its outcome[3]. Secondly, India’s COVID-19 virulence rate remains alarming. Further spikes in virulence and/or death rates could negatively affect prices by increasing the likelihood of stricter restrictions on economic activities. In conclusion, considering the incorporation of the current vital information, we expect a gradual but sustained increase in prices in the absence of unforeseen shocks.  

Photo by Zbynek Burival on Unsplash

[1] https://www.wsj.com/articles/oil-rallies-to-highest-in-two-years-as-stockpiles-shrink-11622549154

[2] https://www.cfr.org/blog/amid-oil-price-collapse-nigeria-running-out-foreign-exchange

[3] https://www.reuters.com/world/middle-east/iran-nuclear-deal-parties-meet-wrap-up-latest-round-talks-2021-06-02/

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