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Oil Rallies in Recent Weeks - İbrahim Halil Aslan

In this article, I want to touch on the reasons behind oil's rallies in the recent weeks. First, let's introduce the oil market and what happened in December. Approximately two months ago, we saw oil prices depreciate madly in the market due to the emergence of a new concern, called "Omicron". We followed the World Health Organization and Organization of Petroleum Exporting Countries, OPEC, the decision about the production level of oil. Then, especially for the last few weeks, we have observed that oil prices have gained substantially of its loss, for Brent Oil from 68 dollars to 93 dollars; for West Texas Intermediate (WTI) from 65 dollars to 91 dollars. They have been appreciated like approximately 40 percent in approximately eight weeks at a single glance. This increase is worth writing about it.

Firstly, I should specify that the increase arises from the fact that the new concern, Omicron, giving-fear as it is supposed to be. According to studies, the new variant is more transmissible: however, early data suggests that it causes a milder level of illness. Also, American company Moderna turned out that an extra one dose vaccine over two doses boosters the protection to Omicron variant. In addition, Pfizer-BioNTech had given almost the same explanation and had claimed a third dose neutralizes the effect of the new variant. This positive news has emerged the hope of continuing economic recovery and supporting the oil market.

It is surely important that how central banks see this variant and its effect on economic development should be considered. We also followed the attitude of central banks, whether they are taking this new variant into account when deciding on the interest rate level. The central bank of the United States, Federal Reserve (Fed), has declared that it has taken some tight policy and gone for the fact that it reduces asset-purchasing at a double pace in December and forecasts the three interest rate hike in both 2022 and 2023. Also, Federal Reserve expected to increase interest rate in March. Apart from Fed, the Bank of England, BoE, has also announced its decision about interest rate level. The BoE takes a much tighter policy than Fed and uses its interest rate weapon to deal with inflation surging. The BoE said in its Monetary Policy Summary in the meeting that "The Omicron variant poses downside risks to activity in early 2022, although the balance of its effects on demand and supply, and hence on medium-term global inflationary pressures, is unclear. The impact of the Omicron variant will push down on GDP in December and in 2022 Q1." It can be clearly understood from this expression that the Bank of England is aware of Omicron and its effect on the economy. However, Omicron is somewhat ignored against surging inflation. Giles Coghlan, the Chief Analyst at London-based Forex and CFD Provider firm HYCM, told Anadolu Agency via email that "Clearly, inflation won the day." European Central Bank, ECB, has also declared its decision of interest rate. Although they did not choose to increase the interest rate, they decided that they would end asset-purchasing by the end of March, which can be commented as taking a little much tighter action concerning the previous meetings. As we look at the decisions of major central banks, Fed, Bank of England, ECB, they have gone for tightening their monetary policies despite the Omicron variant.

As of 5 February 2022, the Brent Oil and WTI are trading at above 90 dollars. This seems to approve to come true that some companies such as Goldman Sachs, which Brent Oil can pass 100 dollars in upcoming days. In recent days, we have other specific reasons supporting the increase in oil prices. One is about Russia and Ukraine. We have started hearing about a new war that can be occurred these two countries. However, the fact that the war will be only between these two countries doesn't exactly seem to be true. There are other countries, US and Europe, maybe China. The tension among these countries makes the price of oil climb above 90 dollars. The second is because of the wave of freezing air in Texas. This affected some production facilities.


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