On Monday, October 11th, oil surged past $80. It was the first time since 2014 that it was trading above the $80 mark. Since early September, oil has risen more than 15% with a variety of factors contributing to the rise.
Demand for natural gas
Demand for natural gas has surged worldwide and prices have risen exponentially, especially in Northern Europe, which is leading consumers to search for cheaper substitutes in the form of oil. Such a switch would only serve to exacerbate the current supply deficit in the oil market. Saudi Arabian oil company Aramco estimates that the shortage of natural gas has generated an increase of approximately 500,000 barrels of oil per day. Other estimates suggest that the potential increase in demand could reach two million bpd.
Despite the surge in demand for oil, OPEC+ producers have decided not to increase the oil supply, and will continue with their previous plan to add only 400,000 more barrels per day in November. Among the OPEC+ nations, some believe that another wave of the coronavirus pandemic could create a dip in oil demand and, therefore, an increase in oil output would not be a prudent decision.
Hurricanes, dollar devaluation and economies opening
Other factors contributing to the boost in commodity prices include the weakening of the US dollar. Oil prices are also rising as economies pick up speed and reopen. Some believe that there will not be any more closures due to the coronavirus, and that the Delta was the last significant wave of the pandemic.
In September, there were also disruptions in the supply chain in the Southern US due to Hurricane Ida where various refineries in states bordering the Gulf of Mexico shut down.
How high could prices go
A strategist for JP Morgan surmised that oil could trade between $130–$150 and that the economy could handle it. Other analysts say that hyperinflation may hit due to the US government’s excessive spending and that oil could reach $180 by the end of 2022. Nonetheless, there have also been voices with a bearish view of the oil market, who don’t believe that the current $80 price for oil is justified.
Investment Opportunities
Although consumers are facing steeper energy prices, investors will be looking to capitalise on a market that seems to only have an upside. Investors may look to gain exposure to oil producing companies or those in the supply chain.
Based on its belief in diversity as well as thematic trading, eToro has created the OilWorldWide Smart Portfolio which diversifies assets among the world’s leading oil-related companies, oil ETFs and direct oil price derivatives. Either way, investors will continue to closely follow the current energy crisis and the opportunities it presents.