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Will crude oil prices continue their slide?

by Başak Ceylan -
  • 16/08/2022 (11:44)
Following Russia’s invasion of Ukraine, crude oil hit a high of $120/bbl amid shifting trade patterns. Oil markets enjoyed a period of high prices amid lingering concerns over supplies from Russia, which was reflected in major oil producers’ recent quarterly financial reports. However, with oil barely hanging on at above $90/bbl, what should one expect in the months ahead?

Oil companies boost profits in Q2

Global oil producers reported record profits for the second quarter of 2022, primarily driven by higher crude oil prices and volumes sold, and higher refining margins. The Saudi Arabian Oil Company (Aramco) was among major oil producers that announced record second-quarter results. The Saudi major posted a 90% year-on-year increase in net income amid an energy price boom that drove oil prices above $120/bbl last quarter.

What drove prices down?

However, market sentiment that largely focused on supply concerns started to shift by the end of the second quarter. According to analysts, there are three factors that accounted for a drop of around $30/bbl in crude oil prices from a peak in June. These include fears of a recession becoming more prevalent, rebounding Russian production and massive Strategic Petroleum Reserve (SPR) releases.

1. Recession

Although several economists pointed out that the US economy is not technically in recession, concerns that it could be heading into one have intensified recently, particularly after the official figures released on July 28 showed that the US economy contracted for a second quarter in a row. This led forecasters to reconsider their outlook as the strong likelihood of recession started to curtail demand.

2. Russian oil

While the world’s largest economy grappled with recession fears, Russia defied expectations of a plunge in oil production. International Energy Agency has revised their outlook for world oil supply upward, with more limited declines in Russian supply than previously forecast. This was largely because of the rerouting of flows to India and China, who stepped in to buy shipments shunned by Europe, the US, Japan and Korea.

3. Reserve releases

Another factor that drove prices down in the supply-side was the release of more than 180 million barrels of crude oil from the US emergency stockpile. As part of President Biden’s plan to ease volatile energy costs, the US Department of Energy has recently announced that nine companies will purchase 20 million barrels of crude oil from the SPR. During the week ending August 5, the SPR’s supply was down to its lowest level since 1985.

Eyes on two big consumers

So how long will crude oil prices decrease? Most analysts agree that it is largely up to the two of the world’s largest oil consumers: the US and China.

In the scenario of a widespread contraction in the US economy, consumer spending weakens, businesses investments drop, and industrial production runs the risk of slowing down. As oil is quite vulnerable to global economic conditions, this will lead to lower demand for oil and petroleum products.

Fresh Covid-19 curbs in China have also recently put risk aversion into centerstage. Disappointing Chinese economic data –which largely stemmed from lockdowns– also fuelled global recession concerns, adding to the drops in crude oil prices.

According to the National Bureau of Statistics (NBS), China’s apparent oil demand fell 9.7% year-on-year to 12.16 million bbl/day, reflecting the effect of lockdowns and property crisis. Although these data show that China’s post-lockdown oil consumption recovery is likely to be lower than initially forecast, most analysts agree that it will nonetheless provide oil demand with some boost.
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