The COVID-19-enforced lockdowns severely disturbed the trade business which had many negative consequences on the oil industry. Many businesses shut down because of a lack of raw materials from the market and the increased transport rates. Oil has always been a commodity with fluctuating prices. However, since COVID-19 took over the world and caused almost every single industry to change its strategy, oil prices have been higher than ever. Israel Figa explains that travel ban, transport charges, lack of raw materials are among the contributing features to why oil prices are reaching the sky.
Let’s review some of the main reasons why COVID-19 is behind the fluctuating oil prices around the globe.
COVID-19 Impact on Oil Prices
Decreasing Raw Material
One of the first steps that were taken in order to control the spread of the infection was to impose worldwide lockdowns. This included the closing of all factories and offices that were in the oil and fuel industry. Due to the elongated lockdown periods, countries ran on a low supply of raw materials for fuel as the factories that produced them were not available to function. Israel Figa explains that the decreasing raw material is one of the major reasons why oil prices were increased. In fact, all the reasons that are discussed below are interlinked and combine to become a major reason for the increasing oil prices.
Increased Demand
Due to the decreasing rate of raw materials, there was a surge in demand for oil because businesses didn’t have the product to continue trade. As has always been the case, an increase in demand brings forward an increase in the cost which is what we are seeing today. Oil prices are at an all-time high because of fact that countries ran out of raw material to continue their trade and sustain their businesses. To make up for the lack of raw materials, the demand for pure oil increased which led to an increase in prices.
The news of successful vaccines brought forward a surge in the demand for oil which revived the declining oil prices during the travel ban.
Increased Transport Charges
Another piece of the puzzle is the freight rate. Because of the reduced levels of trade, ships and cargo did not use much fuel. Israel Figa explains that shipment companies had to make up for the money spent on purchasing fuel that was not used. There was an excess of fuel for ships, airplanes, and cargoes which was due to the trade and travel ban to prevent the spread of COVID-19. So, in order to make up for the fuel cost, the freight charges were increased. This consequently added to the total cost of purchasing oil.
COVID-19 State In Importing Counties
The way the major importing countries are dealing with the COVID-19 crisis also plays an important role in determining the prices of oil. So, if the major importing country has a lag renumber of cases, then its demand for oil will decrease. Currently, India is facing one of the worst conditions since the pandemic started. This hints that oil prices are expected to fluctuate even further. If the importing countries return to the normal state of business, then consumers can expect increasing oil prices.
Final Thoughts
Crude oil has always been a commodity of high volatility. The oil prices are dependent on many different factors including political factors, the demand for oil, raw material access, amongst others. Israel Figa explains that oil prices went through major declines and inclines during COVID-19 and many oil businesses had to close down due to the inconsistent business. The oil prices started tosurge after the first successful vaccine against the coronavirus COVID-19 was announced. Since then, it has been on a steady slope going upwards as trade started and freight charges were increased. Despite that, you can expect fluctuating rates as the second wave of COVID-19 will cause further disruptions in the major importing countries.
