Rise in Crude Prices Indicate Optimism But Could Cause Further Supply Chain Disarray

Written by Dr Raymon Krishnan, Editor-at-Large

Crude is now at its highest rate in the last 11 months. While much of the world remains in an effective depression due to COVID-19, this is one glimmer of hope for the global economy on the horizon.

On the demand-side, markets are showing signs of optimism that the crisis will resolve through vaccines. On the supply-side, Saudi Arabia has aggressively resumed its role as a ‘swing producer’ by restricting output. Last week the Kingdom announced it would cut its own production by 1m barrels a day. This decision seems to come as part of a wider agreement within OPEC to keep production levels stable.

Implied by the oil price rises in the face of Saudi caution is that there may be further price inflation in both the short and medium-term. The knock-on effect on the logistics sector would be an increase in rates. However, the sector is already seeing significant inflation in certain segments, notably container shipping. If inputs such as bunker fuel start seeing violent increases, the impact on freight-rates could be significant, and the resulting rate increase will cause further disarray in an already chaotic global freight landscape.

A series of constraints in logistics capacity such as container shortages, first and last-mile capacity due to lock-downs and driver shortages has emerged in the past year. Adding on higher oil prices could fuel significant inflation. Logisticians now have yet another variable they must consider as they plan, manage and execute their global supply chains.