Why are crude oil prices rising?

8 Jun 2022 , 04:01 PM

Crude oil prices continue to rise. Goldman Sachs has now predicted that oil price will touch $140 per barrel over the next few months. Crude oil price increase has been exacerbated by Ukraine – Russia war. European Union has imposed sanctions on Russian oil imports into EU. These sanctions will put a stop on around 90% of Russian oil imports into EU by the end of 2022. These sanctions only cover oil that is imported into EU through the sea route. It does not cover oil that comes into EU through the pipeline route.

This ban effectively constrains global crude oil supply. With this effective reduction in supply, price of crude oil is set to rise further. But this is not the only reason why crude oil price is rising. The more important reason is that during two years of COVID-induced lockdowns and restrictions, the Organization for Petroleum Exporting Countries (OPEC) cut down its production and supply of oil. Now when demand for oil has returned back to pre-COVID level, OPEC is not increasing production and supply back to pre-COVID level. It has said that it will increase production and supply back to pre-COVID level only gradually. 

The past two years also reduced investments in expansion of refining capacity. Crude oil needs to be refined before it can be used as gasoline, petrol or diesel in vehicles. This shortage of refining capacity is also causing crude oil price increases in many parts of the world, including the United States. 

Countries that enter into contracts with Russia for purchasing its oil will be able to get a lower price for themselves. The price of Russian oil , known as Urals benchmark, is much less than the price of Brent crude oil or West Texas Intermediate oil. Urals benchmark is currently trading at $34 per barrel less than Brent crude. So if the current price of Brent Crude is around $120 per barrel, Russial oil is coming at around $86 per barrel. Payment for oil purchased from Russia cannot be made in dollars because of US sanctions on Russia. So payment for this Russian oil willl have to be made in Russian currency or by some other means. India is one major country that is taking advantage of the cheaper Russian oil, amidst rising prices all around.