InvestorQ : What explains the sharp rally in the price of crude oil in the last few days?
Dhwani Mehta made post

What explains the sharp rally in the price of crude oil in the last few days?

Dilmini Mercia answered.
12 months ago

As I write, the price of crude oil in the Brent market is at a 10 year while the price in the WTI US markets is at a 14 year high. If you look at Brent Crude, then in the last 3 months alone i.e. between December first week and February first week, the price of Brent Crude rallied by 71% from $69/bbl to $118/bbl. That is one of the fastest rallies we have seen in oil and also one of the highest prices in the last decade. What exactly has driven the oil rally?

In a way, the oil market was already bullish and the Russia story only added to the bullishness. If you look at the demand supply scenario before the war in Ukraine, then for a very long time the oil market has been undersupplied to the tune of nearly 2.5 million barrels per day (bpd). That is a huge shortfall and that had kept prices buoyant, especially since most of the large producers were either not able to or not willing to hike supply.

Now let me come to the real tipping point for this oil rally. What tipped the oil price rally really hard was the Russia-Ukraine war, which has escalated in the last 2 weeks-time frame. Remember, Russia supplies close to 7.50 million bpd of oil to the global oil market and it literally accounts for 8% of the total oil supply in the market. US sanctions and embargoes would mean around 8-12% of the supply vanishing from the market. That is the rally.