What are the factors behind the latest soar in oil prices?

The commodities market can be extremely volatile, with oil in particular being highly liquid. This means that the price of oil is constantly fluctuating, which, with the right trading strategy, can be profitable for investors.

When oil trading, it’s vital to monitor fundamental factors, such as geo-political events and relevant national economies, that can impact the value of oil. At the time of writing, the benchmarks of crude oil, Brent and West Texas Intermediate, were recovering from the impact of the coronavirus pandemic. But with a rise in prices recently, let’s take a look at the other factors that have influenced the market movement.

The Organization of the Petroleum Exporting Countries deal

The majority of oil-producing countries are part of an organisation that coordinate the production and supply of oil, and stabilisation of the market, which is the Organization of the Petroleum Exporting Countries (OPEC).

The OPEC consists of 13 countries, and in reaction to the pandemic, and the huge shortfall of demand, they halted supply of oil. This involved a record cut of 10 million barrels per day. As debates continued over the recovery from these production limitations, the ambiguity caused the oil prices to rise. This was especially notable when the United Arab Emirates initially rejected the proposal that outlined the retraction of oil production cuts.

However, the organisation has recently agreed to increase production, to stabilise prices and ease pressure on the world economy. The collective agreement detailed that there would be an increase of 400,000 barrels per day, on a monthly basis from August, with the plan for theoutput to increase from May 2022, and all production cuts to be phased out completely by September 2022.

Although these plans from OPEC would appease the prices of oil, the pace of restoring the oil production is expected to be much slower than the increasing global demand, which means in the coming months, the market could see oil prices of $80 or higher. This is potentially the highest levels seen in over two years.

Some uncertainty still remains, in terms of market sentiment, despite the plans laid out by the OPEC, because there’s the chance that the organisation might reverse the amount of increased oil production. This could be a likely scenario, based on the rebuttable and blocked proposals from Abu Dhabi, United Arab Emirates and Saudi Arabia. With this in mind, oil prices continue to follow an upward trend.

US and Iran nuclear deals

Another factor that has been affecting the price of oil, is the negotiations between the US and Iran, which has involved the discussion of easing of certain sanctions, including the lifting of restrictions on the country’s oil production.

The ambiguity surrounding the likely conclusion of these talks has caused a rise in oil prices. This is because if there is no deal between the two nations, the additional oil supply expected from Iran, would then have to be produced by the rest of the OPEC countries. Therefore, there would be a stretch to keep up the supply, with the increased demand.

On the other hand, if a deal is negotiated, then Iran can add another 1 million barrels a day to the global oil supply, which could expand to 1.4 million barrels a day by 2022. The value of oil relies heavily on the balance between supply and demand, and so if the demand is met with this increased supply, the price of oil will decrease.

However, as previously mentioned, this deal is not concrete at the moment, and so investors can expect to see the price of oil continue to rise.

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