Impact of Demand on Crude Prices
We cannot overestimate how essential oil is to the economy. It is one of the most essential commodities in the world. The crude oil market has a significant impact on many other markets across the globe. At the end of September, crude prices are up more than 85% over 2020, and demand for crude oil continues to grow as society begins to recover from the pandemic.
Demand for crude oil is closely tied to the economy. As an example, during the recent global economic downturn, crude prices dramatically fell as demand slowed down all over the world.
Crude oil pricing has impacts throughout the entire supply chain. In fact, the impact ripples even further. A change in oil prices results in changes to production costs, which then impacts the price of goods and even can affect an entire nation’s GDP, if the price becomes exceptionally high (or low).
This article will explore the concept of supply and demand, and apply it directly to the crude oil industry. It will then examine what drives a change in demand and address the COVID-19 pandemic specifically.
Monitoring the balance between supply and demand is a fundamental skill in today’s petroleum markets. With Refined Fuels Demand, understand where, when, and which fuel demand fluctuations will impact your business by creating a comprehensive data feed customized to your specific needs and markets.
Supply and demand
The concept of supply and demand is simple. If demand is low and there is a plentiful supply, then prices will fall. If demand is high and there is insufficient supply, then prices will rise.
The crude oil market is no different in this respect. If oil demand increases, but there are already high levels of crude being refined or produced by countries worldwide, price increases will be negligible, as there’s plenty of stock to meet demand.
Crude oil enjoys a relatively consistent demand. From relying heavily on crude oil for transportation and energy needs to being used daily by many petrochemical industries across the country; manufacturing plastics, rubber and other common consumer products, oil is always in demand. As a result, nearly every aspect of daily life is connected to the demand for oil.
Oil reserves are another aspect of the supply and demand picture that must be taken into consideration. Oil reserves, meaning oil that is underground and has not entered the refinement process, are broken down into proven reserves, probable reserves, and possible reserves. For example, countries such as Venezuela and Saudi Arabia have billions of barrels of oil in proven reserve.
Production versus refinement
The simple concept of supply and demand is complicated in the oil industry, as the upstream and downstream processes are involved. Geopolitics and national public policies have a large influence on how and when crude oil is extracted. Sudden conflict (or even the threat of one) can derail production upstream.
Assuming all factors in that first part of the production equation are optimal, there’s still a wrinkle: what happens to that crude when it arrives in the US?
There are only 129 refineries in the United States, with only a handful of new refineries built since the 1970s.
Thus, we can see there is much more that goes into how the supply (crude oil extraction) and demand (refined fuels purchases) of the petroleum market really works.
Factors that impact demand
Take a look at some different situations that would impact the use and availability of oil.
Natural disasters are one factor that influences oil supply. Floods and hurricanes can affect the ability to refine or transport oil. Since the demand did not match the loss in supply, oil prices rose 7% after Hurricane Harvey in 2017.
More recently, Hurricane Ida has had a significant impact on oil production, with experts estimating that 40 million barrels of crude production will be lost.
Political and economic issues can also affect crude oil demand. For example, Iran’s oil output has decreased since May 2018, when the US announced it would withdraw from the Joint Comprehensive Plan of Action and reimpose sanctions on Iran’s oil exports. While sanction waivers had been granted by the US, production continued to decrease after these ended in May 2019.
One of oil’s top uses is in production and manufacturing. Therefore, a change in the world’s economic conditions could also change crude oil demand. For example, a global recession would decrease demand for manufactured products, leading to factory shutdowns. In turn, this decreases demand for crude oil.
Oil consumption changes throughout the seasons. By way of example, oil for heating decreases in the summer and increases in the winter, and demand for crude increases in anticipation of summer vacation driving in the US.
Crude oil production and consumption have impacts on the environment. A growing awareness of those effects has resulted in government initiatives that attempt to slow the rate of climate change. Carbon taxes and emissions trading strategies that add a cost to producing crude oil are examples of such initiatives. Other government initiatives, combined with a growing interest in preserving the environment, could also impact the demand for crude oil.
The impact of COVID-19 on crude prices
From the rise in telecommuting to the sudden halt in travel, COVID-19 altered most aspects of society.
The crude oil market also experienced a radical change with COVID-19, and demand for crude was hit hard: there were more than 250,000 fewer barrels of oil consumed in the United States on average per day compared to pre-COVID demand levels. Aviation fuels have been the most impacted by the reductions in both business and personal travel.
Many countries have had recurrences and variants of COVID-19 that have resulted in a slower recovery than expected. While there have been pockets of recovery, many of these changes (such as teleworking) may become commonplace and permanent.
However, the downward pressure on oil demand may be mitigated somewhat by the increase in online shopping. The rise in online shopping corresponds to an increase in the use of fuel for transporting freight.
Having real-time gasoline consumption figures is described as “the holy grail of metrics.” Understanding the unique relationship between supply and demand in the oil industry is foundational in navigating today’s petroleum markets.
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