Controlling the spike in the new COVID-19 cases seems to be an important reference for portfolio investors.
By
ARI KUNCORO, Rector of the University of Indonesia
·4 minutes read
The latest development in world oil prices has been very interesting, especially because there is a reciprocal relationship between oil demand and the resurgence of COVID-19 cases. World oil demand will recover if the increase in COVID-19 transmission can be controlled, allowing room for the world economy to grow again. The Organization of the Petroleum Exporting Countries (OPEC), as a cartel, can influence market prices as its members can determine the volume of production that will be poured into the world market. However, OPEC became a victim of its own success.
RANIA SANJAR/AFP
A gas station attendant refills a car at a station in the Saudi capital Riyadh on May 11, 2020. - Saudi Arabia\'s energy ministry said it had asked oil giant Aramco to make an additional voluntary output cut of one million barrels per day starting from June to support prices. The move will reduce the production of the world\'s biggest crude exporter to 7.5 million barrels per day, the energy ministry said in a statement cited by the official Saudi Press Agency. (Photo by RANIA SANJAR / AFP)
High world oil prices have allowed countries in the North Sea with high production costs, such as Norway, to enter the market again. This undermines OPEC’s power as a cartel, not to mention when non-OPEC members such as Russia and several other newcomers also became more active players in the world oil market. As a result, OPEC is losing its dominance and is often said to be no longer relevant as a pricemaker.
With the COVID-19 pandemic, OPEC seems to have regained its status as the main player in determining world oil prices. The pandemic has forced the world to limit people’s mobility in various forms. As a result, the demand side of the world economy collapsed, which had a domino effect on supply chains that suddenly lost buyers.
At an extreme example, international oil prices once reached the negative zone in April 2020. As a result, the owners of crude oil stocks, in order to reduce their inventories, were willing to spend money so that someone else can take the excess stock. The phenomenon of negative crude oil prices only lasted a month because they recovered in the following month with a 90 percent increase.
Since May 2020, international oil prices have received a boost, especially with the prospect of the recovery of two world giants, namely China and the United States. After suffering a contraction in the first quarter of 2020, the Chinese economy gradually recovered in the following three quarters, with a growth rate of 3.2 percent, 4.9 percent and 6.5 percent, respectively. The recovery continued and it achieved a phenomenal growth of 18.3 percent in the first quarter of 2021. As a result of the stimulus policy, the US economy also grew 4.3 percent and 6.4 percent in the fourth quarter of 2020 and the first quarter of 2021.
Since May 2020, international oil prices have received a boost, especially with the prospect of the recovery of two world giants, namely China and the United States.
International oil prices continued to creep up. In May, Brent crude oil reached US$70 per barrel. The price of WTI crude oil also increased. OPEC seems to have regained its dominance as many non-OPEC producers have yet to recover. The decline in world supply has made OPEC relevant again as a cartel.
However, there are several factors that are holding back oil prices (Rizvi, 2021) in the range of $70 $80 per barrel. First, China began to use its reserves so its demand in the spot market also decreased. This is also part of efforts to curb rising world commodity prices. Second, the rise in oil prices has also enabled shale oil producers to reenter the market.
Kompas
FILE- In this Sunday, Dec. 20, 2015 file photo, a man rides a camel through the desert oil field and winter camping area of Sakhir, Bahrain. OPEC nations have agreed in theory that they need to reduce their production to help boost global oil prices during a meeting in Algeria, but a major disagreement between regional rivals Saudi Arabia and Iran still may derail any cut. (AP Photo/Hasan Jamali, File)
A rise in world oil prices also affects the domestic economy. On the positive side, the rupiah exchange rate is still quite stable, thanks to the surplus in the country’s trade balance, which reached $2.3 billion in May. Cumulatively, the trade surplus reached $10.17 billion in the January-May period.
One of the risks for the rupiah exchange rate may occur if the US Federal Reserve begins tapering its quantitative easing program due to the high inflation that exceeds 5 percent, like in the 1970s. For Indonesia, the risk will not solely stem from concerns over a “taper tantrum” or an increase in interest rates in the US, but also from a sharp increase in daily COVID-19 cases. This can be seen from the relatively fast depreciation of the rupiah against the US dollar, from 14,320 to 14,460 in a single day.
For Indonesia, the risk will not solely stem from concerns over a “taper tantrum” or an increase in interest rates in the US, but also from a sharp increase in daily COVID-19 cases
Controlling the spike in the new COVID-19 cases seems to be an important reference for portfolio investors. Therefore, it is important to reduce the daily positive case rate to a level below 10,000. This is also very important to maintain macroeconomic fundamentals and external balance, which can provide room for a post-pandemic economic recovery.
(This article was translated by Hendarsyah Tarmizi)
