Rise in price of oil fuels hope of economic recovery
JOHANNESBURG – Oil producers this week smiled on the general market optimism and increased risk appetite that saw Brent crude prices breaching the $40 a barrel mark for the first time in three months.
On Wednesday, Brent spot prices touched $40 a barrel on hopes that Opec members wanted to extend record production cuts for at least one month.
Carlo Alberto De Casa, the chief analyst at ActivTrades, said that the optimism on markets was giving further fuel to the rally in oil.
“There is growing confidence of a swift economic recovery after the Covid-19 shock, sustained by central banks’ hyper expansive monetary policies, while the number of new coronavirus infections starts to slow down in many countries,” said De Casa.
Oil price volatility made history in April when the Western Texas Intermediate (WTI), the US oil benchmark plummeted to below zero for the first time on record as the Covid-19 pandemic dented demand. Prices have, however, recovered from the ashes.
“The WTI price (July expiry) is playing with the level of $38 a barrel, while prices are in the middle of the gap left open in March, when a deal between Opec+ was not reached, and coronavirus lockdown started in Italy and other countries, causing a temporary collapse in demand,” De Casa said.
The monetary and fiscal programmes from the major global central banks and expectations of improved economic conditions as economies opened from lockdowns, supporting
risk appetite and aided portfolio flows to emerging markets so far in June.
The sentiment saw the rand strengthening breaching the R17 to the dollar psychological mark for the first time since the imposition of the Covid-19 pandemic regulations.
By 5pm on Friday, the rand exchanged hands at R16.87 against the greenback from an average of R18.15 against the dollar in May on the weakening of the greenback and improved global sentiment.
Izak Odendaal, Old Mutual Wealth’s investment strategist, said the increase in the oil price was partly as a result of further cuts from Opec.
“But the rally in crude also reflects increased global risk appetite, as is also visible in the weaker rand, stronger rand and higher equity prices.
Other commodity prices have also rallied. If this continues, we may well see higher oil prices,” Odendaal said.
Lester Davids, a trading desk analyst at Unum Capital, said the increase in the oil price would likely hit the pockets of South African motorists.
“In terms of South Africa, the increase in oil prices raises the possibility of a rise in fuel costs however with the strengthening of the rand versus the US dollar has offset this possibility,” said Davids.