Crude oil prices have been on a tear, hitting a three-year high of $74.74 per barrel on June 28. Since the start of 2021, crude oil prices have advanced approximately 50%; that’s a remarkable recovery when oil prices cratered to negative $40 per barrel in April 2020.
Oil prices have experienced huge gains since the global economy and stock market crashed in February/March 2020 on fears about COVID-19. But thanks to the successful vaccine roll-out, and the reopening of the global economy, crude oil prices are on the rise and it appears as though demand for oil could outstrip supply.
Why Are Crude Oil Prices on the Rise?
There are a large number of reasons to be bullish on crude oil over the coming quarters. First, the global economy is opening up and the demand for oil has skyrocketed. In June, China’s crude imports jumped nearly 9% month-over-month to 10.54 million barrels per day (bpd). That number is still lower than the 13 million bpd China was importing in June 2020, but demand from the world’s second largest economy is heating up.
Demand for crude oil in the U.S. is also red-hot. The American Petroleum Institute reported a 7.983 million barrels of crude oil for the week ending July 2. Analysts were looking for crude oil inventory to fall 6.2 million barrels. This represents the seventh consecutive inventory draw from the country’s largest storage hub in Cushing, Oklahoma. There are concerns that inventory levels could fall to their lowest levels by the end of September.
It couldn’t have come at a worse time. People are starting to travel, economies are opening, and manufacturing is picking up. Not surprisingly, the demand for oil has sent gas prices to their highest level in years. In the U.S., the average price of a regular gallon of gas has jumped 44% year-over-year to $3.13.
How High Could Crude Oil Prices Go?
The only way to remedy the supply/demand imbalance is for OPEC+ to pump out more oil. But it doesn’t look like that’s going to happen any time soon.
The Organization of Petroleum Exporting Companies (OPEC) and it’s allies, which includes Mexico and Russia, cancelled a meeting on July 5 after they failed to agree on production increases. They have yet to set a new date.
In April 2020, OPEC+ removed roughly 10 million barrels per day from production to support oil prices as demand plummeted on the heels of the coronavirus pandemic. Since then, OPEC+ has been slowly increasing production. But it hasn’t been enough to meet the strong global demand.
This imbalance could send oil prices to record levels. Former U.S. energy secretary Dan Brouilette noted, “You could very easily see oil hitting $100 a barrel, potentially even higher.”
On the other hand, oil prices could take a hit if OPEC+ fails to come to an agreement and member countries each decide on their own production levels.
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