Oil Prices Are In Turmoil Right Now. Here Are 5 Things You Need To Know

Camila Domonoske

July 07, 2021 / 2:50 pm

Oil prices have been rising steadily for months. You've probably noticed one big consequence — average gasoline prices have climbed to 7-year highs.

As early as last week, the expectations were that oil prices would either stabilize or rise gradually — until an OPEC+ meeting that was supposed to be routine ended in an unexpected impasse, with no agreement on what to do about oil production.

Now analysts are bracing for everything from a price spike – to a plunge. As millions of Americans hit the road again, there's just no certainty around where crude is headed.

Here's what you need to know about the volatile oil prices:

Demand for oil is finally coming back

Last year, as the coronavirus pandemic spread around the world, global oil demand dropped remarkably fast. People stopped driving and flying. Markets were thrown completely out of whack.

So oil producers slashed their production — including a historic cut in output from the group of countries collectively known as OPEC+, which includes major producers Saudi Arabia and Russia.

Now demand is returning, as the U.S., China and some other parts of the world reopen for business as the impact from the pandemic wanes.

Commutes, vacation flights and road trips are all pushing fuel demand up. In the U.S., a record number of people hit the road over the July 4th weekend, according to AAA.

But oil producers are still pumping less oil

One huge reason for the supply-demand mismatch is that OPEC+ has taken a very gradual approach to putting barrels back on the market. That's intended to keep prices high, increasing revenues for oil producing countries.

Meanwhile, U.S. producers have also been pumping less than expected, as they focus instead on making money for investors. (This was a surprise to everyone, as the shale patch is famous for exuberantly producing oil when prices are rising).

The result is a totally different market than a year ago — one that's been driving prices steadily up.

"We've seen a bit of a pivot, and now we're actually looking at, well, what is going to happen if there is a supply shortage?" says Louise Dickson, a senior analyst at Rystad Energy.

Then OPEC+ met and things got interesting

OPEC+ members got together for their monthly meeting last week. Pretty much everybody expected them to gradually increase their combined output — but not so much that it would cause prices to drop. That would serve the group's best interests, and would have matched what the cartel has been doing recently.

Instead, the meeting devolved into drama, as the United Arab Emirates wanted to be allowed to produce more oil individually, which Saudi Arabia opposed. RBC Capital noted there are "seemingly Shakespearean elements to this drama," which suggests a rift between two crown princes who were once extremely close.

Whether it's geopolitics, economics or interpersonal intrigue driving the dispute, the powerful cartel found itself at an impasse. After days of talks the meeting was called off indefinitely — with no deal and no set plans to meet again.

That means the supply-demand imbalance is set to grow even more than expected. You'd expect that to drive oil prices up. But the actual consequences have been more complicated, because ...

People don't know what this means for OPEC+

The OPEC+ drama has created two completely opposite concerns.

If the cartel doesn't clinch a new deal to increase production and the current deal remains in place, that would drive prices up — some analysts see $90 a barrel for oil as a possibility.

Such a spike would not be good for many world economies. It would lead to a surge in gas prices and hit many sectors that depend on oil like airlines.

On the other hand, if the infighting causes OPEC+ to completely abandon its current production cuts, there could be a free-for-all that would cause a ton of oil to flood the market. That would push prices down — potentially dramatically — a few months from now, which could cause chaos for oil producers.

The two outcomes could not be more different. And the uncertainty about which might happen has created an interesting few days on oil markets. Global crude prices rose to a multi-year high on Monday, off the news that there was no deal. Then they plunged on Tuesday and Wednesday, wiping out weeks' worth of gains.

And of course, it's still possible that OPEC+ will announce a deal that would land somewhere in the middle, and potentially stabilize prices. In fact, many analysts think that's the most likely outcome, despite the lack of any public progress toward it, because ...

There's a ton of pressure for a compromise

In early 2020, OPEC+ caused prices to go haywire thanks to a price war between Saudi Arabia and Russia. But that was quickly followed by the historic agreement to cut production, which is widely credited with re-balancing crude markets and supporting prices for well over a year.

Now, there's a lot riding on whether OPEC+ can again strike a deal to keep markets balanced.

Either a price spike or a collapse would be bad news for OPEC+ members. And a spike would be particularly worrying for the world's oil consumers, given that prices are already quite high.

In the U.S., the Biden administration is clearly concerned about the prospect that gas prices might rise even further.

Under former president Trump, the White House got unusually involved in OPEC+ negotiations, and President Biden seems to be continuing the tradition — the White House has talked directly to multiple OPEC members and is urging a compromise to boost production.

It's another sign of how quickly things can change in the oil industry. Just a few years ago, plenty of oil experts were asking if OPEC was a has-been, issuing edicts from its headquarters in Vienna with no real impact on oil markets.