The third quarter of 2023 has seen a significant surge in global crude oil prices, capturing the attention of investors, policymakers, and consumers alike. Crude oil investing, like seen on iForex, is on the rise, with global Futures volume almost reaching 1,300,000 in a single day on August 9th.
This article aims to explore the reasons behind this trend, assessing the underlying causes of the recent surge, and what may play an increasing role in Crude oil’s future.
The OPEC+ Influence
The Organisation of the Petroleum Exporting Countries (OPEC), along with its allies like Russia, collectively known as OPEC+, has been a pivotal force in shaping oil prices. Their recent decision to extend production cuts into the next quarter has led to a tightening of oil supplies globally. This scarcity has been a significant driver behind the upward trajectory of Brent Crude prices.
When supply reduces and demand remains still, prices inevitably go upwards. This has been evident throughout the invasion of Ukraine, where major exporters of commodities such as oil, but also wheat, nickel, and many other common Futures, all sharply boomed in price.
The move from the OPEC+ is seen as a strategic play to maintain higher price levels, thereby benefiting the member countries at the expense of consumer nations. OPEC+ members include Qatar, UAE, Libya, Kazakhstan, Sudan, and a few others. Inevitably, many of these members are not allies with the west, meaning they take measures to protect their income, of which oil plays a large role. It was Saudi Arabia and Russia who surprised analysts regarding the voluntary supply cut.
Economic Signals
China’s economic policies aimed at reviving its economy have had a mixed impact on oil prices. While some measures have led to increased domestic consumption, others have not had a significant impact. It’s also relative to recent times; while China’s oil consumption fell over the pandemic and subsequent economic headwinds, their economy is slowly getting back on its feet.
Surge in Global Consumption
The world is currently experiencing an unprecedented demand for oil. Factors such as increased air travel during the summer months, a rise in oil-powered electricity generation, and surging petrochemical activity in countries like China are pushing global oil demand to new heights.
Economies are doing better than expected across the board, such as the UK, China, and the US’ strong recent performance, meaning economic outlooks are more promising than earlier in the year when inflation was at its peak. So, while Russia’s supply cuts to boost reserves and stabilise prices is one half of the puzzle, demand is also remaining strong too.
Forecasts suggest that oil demand will continue to grow, reaching a record level in 2023. This surge in consumption is not just a short-term phenomenon but is expected to have long-lasting implications on the oil market.
Inflationary Pressures and Interest Rates
The ripple effects of rising oil prices are far-reaching, impacting inflation and interest rates. As oil prices climb, the cost of goods and services that rely on oil for production and transportation also increases. This has led to a rise in inflation rates, which in turn puts pressure on central banks to adjust interest rates. The U.S., for instance, is already experiencing an increase in average petrol prices, affecting the daily lives of its citizens. Energy has been a core driver of inflation, and oil is often used as a hedge against it. Whilst inflation is somewhat cooling, interest rates are expected to raise once again which may be fuelling speculative buying.
Trading Crude Oil: CFDs Versus Traditional Investment
The oil market is inherently volatile, influenced by many factors including geopolitical tensions, natural disasters, and economic indicators. This volatility can be both an opportunity and a risk for traders and investors. For instance, sudden geopolitical developments can lead to sharp price spikes, offering quick gains for some but significant losses for others who are caught on the wrong side of the trade.
Crude oil investing through CFDs and margin offers the potential for higher returns due to the leverage involved, but also expose themselves to larger losses. Markets have been more volatile since the pandemic, as stability hasn’t really resumed; its effects can still be felt today. One overlooked effect of the pandemic had been the rise of retail investing, of which crude oil is traded.
The escalation in global crude oil prices during the third quarter of 2023 is a complex interplay of various factors such as OPEC+ decisions, economic activities, and global demand. Ultimately, supply has played a larger role than demand in the upward price movement, as global supply has remained uncertain and reduced ever since the invasion of Ukraine began. As Europe fights for new alternatives, its success in these endeavours could be the next major influence on global crude oil prices.