Who Saved Oil Market from Pandemic? OPEC or oil Traders?

Published March 31st, 2021 - 08:00 GMT
Who Saved Oil Market from Pandemic? OPEC or oil Traders?
Interestingly, 2020 saw more of the same, and in some cases, even better results, after top oil and commodity traders posted larger record profits, mostly by leveraging the famous “contango” plays, especially during the historic low oil prices in April and May 2020. (Shutterstock)
Highlights
Obviously, during the pandemic, when airlines were grounded and gasoline consumption reduced, producers needed to reduce output, but traders were still active.
Although oil demand is still far below pre-pandemic levels, prices have exceeded them. Yet producers from the Organization of the Petroleum Exporting Countries (OPEC) have shown great flexibility in adapting their output cuts as the market dictates.
Such flexibility may again come into play as the group considers whether to extend the tight market strategy in the rest of the second quarter during this week’s OPEC and non-OPEC ministerial meeting on April 1.
 

Obviously, during the pandemic, when airlines were grounded and gasoline consumption reduced, producers needed to reduce output, but traders were still active.

It is a fact that the average price of Brent crude was $64 per barrel in 2019, and was much lower, at $42 per barrel, in 2020. At these price levels, oil traders have made much more money during the pandemic.

Bloomberg reported that dozens of large oil traders made billions of dollars in profits in 2019, with many posting record earnings thanks to the rocky oil market.

Interestingly, 2020 saw more of the same, and in some cases, even better results, after top oil and commodity traders posted larger record profits, mostly by leveraging the famous “contango” plays, especially during the historic low oil prices in April and May 2020.

It has been reported that in 2020, oil traders have made tens of billions of dollars, even with prices dropping, while producers did not take advantage economically of the situation. In my opinion, for some producers, the burden of collapsing oil prices could have been reduced and the task of balancing national budgets could have been less difficult and cumbersome.

However, some OPEC producers, in addition to acting on supply and demand only, could have also looked at the risk management mechanisms to take advantage of collapsing oil prices.

Successful OPEC efforts to balance the market, coupled with the fact that central banks intervened massively to shore up economies, are just a few examples of responses to the pandemic. It is believed that the worst of it is now behind us, indicating that the global economy will pick up. However, traders and investors are still taking advantage of fluctuating and choppy oil markets.

Isn’t it time that all oil producers adopted a proper risk management technique? This should be undertaken together with the efforts of all regulators for oil trading activities whose task is to monitor them and to stop manipulation, which must be avoided in all markets.

Faisal Faeq

The views/opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Al Bawaba Business or its affiliates.


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