Why the Price of Oil Surged Beyond $65 a Barrel

What happened

Oil bulls and investors in oil stocks such as BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) have watched with pleasure as the price of oil has risen above $65 a barrel. The move follows the surprise decision by OPEC+ to keep supply restrictions in place through April. Given that the OPEC group includes Saudi Arabia, Iran, and Iraq — while the “plus” bit includes Russia and nine others — it’s a safe assumption that the supply of oil will tighten.

An oilfield worker.

Image source: Getty Images.

So what

When supply is kept tight, and demand is set to recover with an improvement in the global economy, then there will be upside pressure on the price. Given that the move will extend through April, it’s possible there will be more pressure to come.

On the other hand, the deeper consideration is whether the OPEC+ move will be sustained beyond that period. The initial production cuts by Saudi Arabia, announced in January, were widely seen as an attempt to drive the price higher in the near term.

With the price now above $65 and the fact that this is an artificially created tightness in supply, it’s entirely possible that the constraints will be lifted in the future. That argument will be even more relevant if demand increases as expected, meaning that suppliers could be convinced that the price will stay stable even if they increase production. 

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Now what

There may well be upside pressure on the price in the near term, but all it will take is a decision to lift supply constraints, and a downside correction is possible. Time will tell.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/03/05/why-the-price-of-oil-surged-beyond-65-a-barrel/

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