Global events that increased November oil prices

A number of significant happenings in November sent Brent crude prices on a climb from $37 per barrel early in the month to about $48 by the end of last month.

A 10-dollar price hike all in one month is indeed significant. And this hike will no doubt be felt by Kenyan motorists when the higher cost of imports is passed through by the regulator in mid-January 2021.

Global oil markets and prices are overly sensitive to positive and negative news of real or speculative occurrences that have the potential to influence oil supply and demand equilibrium. These days, global geopolitics (especially in the Middle East) are becoming unpredictable, and these continue to impact oil supply/demand and prices, either way.

Oil prices have been down throughout this year mainly due to a steep drop in petroleum products demands caused by impacts of Covid-19 epidemic on global economies. The virus reduced economic activities, local and air travel, tourism, as job losses reduced consumption and manufacturing. All these happened at a time when the world was over-supplied with oil, and prices were already down.

The biggest oil price driver in November was the announcement that several brands of vaccines for Covid-19 are indeed ready for distribution and application. Coming at a time when the world is facing a Covid-19 resurgence, the vaccines are expected to provide final solutions to effectively manage and arrest the virus and permit economic activities to resume. This will provide an opportunity for oil demands to increase and prices to strengthen.

The second most significant news that contributed to oil price hike in November, was the certainty of Joe Biden's election as the future US president. His commitment to seeking early Covid-19 epidemic solutions is seen as prompting quicker revival of US economy and oil demands. The Biden news is also viewed as a positive factor to global economic confidence and revival, considering his broader views on multilateral global economic participation.

The third major influence on oil prices is the expectation that the OPEC (Organization of Petroleum Exporting Countries) meeting on November 30 will vote to maintain OPEC reduction of oil production at 7.7 million barrels per day (mbpd) through first quarter of 2021. The world oil demand before the ravages of Covid-19 was heading towards 100 mbpd.

There are other supply and demand dynamics that will come into play, and these will influence prices either way. Should global crude oil prices increase and persist in the region of $50, the chances are that the US shale oil producers will be motivated to increase their production.

If this happens, it will undermine price gains made by the OPEC+ self-imposed production restrictions. This may result in OPEC retaliations causing global oil price collapse - scenarios which have played out twice in the past

There is also Libya which continues to regain its long-lost production, and this could well put as much as 1.5 million bpd back into the global supply, with the impact of slowing down oil price recovery.

Also, depending on President-elect Biden's stance on economic sanctions against Iran, we could see more oil exports into the market. In respect of Venezuela, it is unlikely that Biden will change US policies, and this will keep Venezuela oil out of global supply.

As usual the oil markets will continue to closely follow Chinese economic recovery and performance, this being the one most significant barometer of global oil demand swings. And currently economic indications from China continue to be positive.

Longer term, the coming of President Biden will accelerate the shift from oil towards renewable energy, and this will gradually alter the oil supply and demand equilibrium. Reduced investments in oil production by major oil companies will most likely balance reduced demands and maintain sanity in oil prices.

If prices continue to move well above $50, it will provide hope that the oil resources already discovered in East African, including Kenya, will one day be developed. However, this must be viewed against the ongoing investment caution by oil investors, who are re-modelling their capital structure to gradually shift away from oil towards renewable energy.