The price of oil has risen to a two-year high as OPEC and its allies anticipate increased demand.
Producers led by Saudi Arabia and Russia intend to increase output as global demand for commodities increases.
Oil prices soared to multiyear highs above $70 a barrel after OPEC and its allies forecast increased demand and increased output, capping a global economic renaissance that has pushed up the prices of a wide variety of commodities.
The move by a group of oil producers led by Saudi Arabia and Russia amounted to a continuation of the sharp cuts they implemented at the outbreak’s start. Recent oil price milestones follow those set by commodities ranging from tin and copper to lumber. They have all increased in price as a result of pent-up demand that is straining producers to keep up.
“It is a classic reflation trade,” said Tom Price, head of commodities strategy at investment bank Liberum, referring to expectations of a burst of economic activity that boosts asset prices. Mr. Price noted that such a broad grouping of commodities has not risen concurrently for this length of time since the economic recovery following the 2008-09 financial crisis.
Brent crude, the international energy benchmark, increased 1.3 percent to $70.25 a barrel, its highest closing price since May 2019. West Texas Intermediate futures, the benchmark for the United States, rose 2.1 percent to $67.72 a barrel, the highest level since June 2018.
The Organization of the Petroleum Exporting Countries and its allies, dubbed OPEC+, agreed Tuesday to a previously planned increase in output of about 450,000 barrels per day beginning next month. Meanwhile, Saudi Arabia agreed to maintain its separate, unilateral cuts of one million barrels per day that it implemented earlier this year.
In April, the group agreed to increase output by more than two million barrels per day by the end of July, bringing the total to around four million barrels per day over the last year. This represents a sizable portion of the 9.7 million barrels per day the group agreed to cut in early 2020, when the coronavirus began shutting down economies, sapping global crude demand and driving prices lower.
With infection rates generally declining in much of Asia and China—the world’s largest oil consumer—and vaccine campaigns advancing in the United States and Europe, OPEC and a group of non-OPEC producers led by Russia are betting that markets are once again ready for additional oil. According to OPEC delegates, a technical committee of the OPEC+ group forecast on Monday that oil demand would increase by six million barrels per day in the second half. As a result, they predicted that global oil stocks will fall below their five-year average for the period 2015-2019 by the end of July, signaling the end of the pandemic glut.
Demand for oil and other commodities has mirrored the pandemic’s dramatic swings in global economic activity. After a sharp decline in the second quarter of last year as large swaths of the global economy were put into hibernation, demand for oil has recovered as many developed economies thawed in recent months.
By the end of last year, strong demand for a variety of goods that assisted households and businesses in adapting to the constraints associated with living with the Covid-19 virus had pushed global industrial production above its pre-pandemic peak. As a result of subsequent growth, the world’s factories have become ravenous for energy and raw materials. A weaker dollar also increases the attractiveness of dollar-priced commodities.
Demand is expected to increase further this year, as the global economy is expected to expand at its fastest pace in decades. The Organization for Economic Cooperation and Development forecasted Monday that global output will expand by 5.8 percent, the fastest pace since 1973.
Demand for commodities required to sustain that expansion may act as a brake if supply cannot keep up. Increased oil prices have contributed to a global acceleration of inflation. Consumer prices in the eurozone were 2% higher in May than a year ago, the fastest increase since late 2018. However, a large portion of that increase was due to higher energy prices, which were 13.1% higher than a year ago.
In the United States, the Commerce Department’s inflation measure indicated that consumer prices increased 0.6 percent month over month and 3.6 percent year over year in April. Core prices, which exclude energy and food, increased 0.7 percent on a month-over-month basis and 3.1 percent on a year-over-year basis.
China, as a large commodities importer and the first major economy to recover from Covid-19, has had to absorb increased costs for a variety of commodities, from crude oil to copper and iron ore, over the last year. This has posed new difficulties for China’s economy.
Smaller manufacturers are particularly hard hit, as their profit margins have been squeezed in recent months due to high raw material prices. In response to these rising cost pressures, a growing number of Chinese factories have recently increased product prices. Others have temporarily ceased operations and declined new orders. Factory-gate prices in the country increased 6.8 percent year over year in April, the most in 312 years, owing to surging commodity prices.
Central bankers have stated that they expect inflationary pressures to ease toward the end of the year as commodity producers and factories increase production in response to higher prices. OPEC’s move on Tuesday reaffirmed that assessment.
OECD’s chief economist
“We are seeing rising oil and commodity prices, as well as some strange effects from changes in consumption patterns,” said Laurence Boone, the OECD’s chief economist. “However, this should subside as the supply response takes effect.”
Nonetheless, rising prices are already making manufacturing more difficult. Companies ranging from General Motors Co. to Vestas Wind Systems A/S, a Danish wind turbine manufacturer, have expressed concern about the rising cost of steel.
“It’s a significant issue for automakers,” said Andy Palmer, a 40-year industry veteran who served as the former CEO of British automaker Aston Martin. “I have witnessed periods of volatility in commodity prices, but it is unusual to see almost all raw materials rise at the same time,” he said.
While the global oil spigot can be turned on relatively quickly—OPEC can tap into its vast untapped capacity—it is much more difficult for miners and farmers to abruptly increase coal, copper, or cotton production. The price increases are compelling mining companies, for example, to rethink their future strategies.
Glencore PLC, a commodities trading company, stated in February that it is considering restarting production at the world’s largest cobalt mine in the Democratic Republic of Congo. Glencore chose to shut down the Mutanda mine, which also produces significant amounts of copper, in August 2019 as both metals’ prices plummeted. Prices have soared in recent months as a result of lingering supply bottlenecks caused by the pandemic and booming demand from rebounding Asian economies. Copper prices soared to a record high last month. Cobalt prices have increased by more than 50% this year.