Oil prices continue to stay above the US$ 50 level, and it seems to be wanting to base itself at these levels for a potential upward movement. This trend in prices is despite the fact that the economic realities prevailing globally do not permit any surge in oil prices.
The Asia-Pacific Region is dominated by two large economies of the region, China, and India, and they account for close to 36 % of global demand. China contained the pandemic quite fast and the economy is showing signs of recovery going by the recent trend in the major macro variables. In fact, China witnessed a kind of V-shaped recovery, and this led to a recovery in the demand for oil in China. As against a growth in demand to the tune of 680,000 barrels p/d, the last year witnessed a fall in demand to the tune of 1.60 mio barrels p/d, and it is likely to recover by 1.50 mio barrels p/d during the current year. The negative impact on oil is mainly from the fall in the transportation related demand for fuel due to the lockdown. The contraction in demand globally has been to the tune of 8 mio barrels p/d during the last year which saw demand destruction equivalent to that of ten years.
The current year may see a pickup in demand close to 6 mio barrels p/d. India is yet to come out of the lock down completely, and it may be at least another three months before the restrictions are completely withdrawn. This may normalize provided there is no surge in new cases by way of a second wave of the pandemic.
The US sanctions on Iran has crippled Iran as it is almost cut off from the rest of the world. Many view the continuing sanctions as a source of future tension in the Middle East, and it may also be further accentuated by the fact that the US-Russia relations may also turn more difficult with the change in the administration in the US.
The US Dollar has been weakening against all the currency majors, and usually a weak Dollar triggers a rise in oil prices. This is due to the fact that oil is quoted in US Dollars in the international markets. In the earlier stretches of US Dollar depreciation also the same trend was witnessed. The logic may be that an exporter when compensated in a depreciating currency may ask for more units of the currency in which he is paid if the currency is depreciating. The Saudi finances are weak, and they are brittle like never before and they would also require higher prices to see the year through more comfortably. The new range for oil is most likely US$ 50 to US$ 60 unless very negative demand factors hit the economy and the markets in the coming months, which is quite unlikely.
