Current Supply & Demand of Crude Oil

Chart: Courtesy of National Bank Independent Network

The price of crude oil is one of the key drivers of global inflation. It is an input into almost all manufactured items as well as the obvious impact it has on gas prices and heating. Oil is priced according to the location and quality of the product. For example, in North America the most important is West Texas Intermediate (WTI). Oil from the oil sands of Alberta is priced at a discount to WTI and is known as the Western Canadian Select. The key international benchmark is Brent Crude which is a light sweet oil produced in the North Sea.

The price of crude oil is based on a fundamental law of economics, “Supply and Demand”. The chart above shows the global supply as the red line and global demand as the black line. The gap between the red and black lines indicates that there is a surplus of supply of approximately 2.7 million barrels per day. This is unexpectedly high and thus indicates that the price of crude is likely to fall if this imbalance is sustained or viewed as being sustained.

The last time we saw this sort of imbalance was between 2014 and 2016 and oil prices generally traded between $40 and $65. Thus, if supply continues to exceed demand, it is reasonable to expect that WTI will trade between $50 and $70 over the next year. This would assume that the global economy does not experience an abnormal growth spike and that Russian oil continues to find its way onto the world market.

An oil price below $60 would be positive for inflation, allowing the central banks to ease up on monetary policy and provide a platform for equities and bonds to produce reasonable returns.  In a circular logic, that also likely leads to a recovery in oil prices as increasing demand closes the gap with supply.

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