Why are oil prices declining despite supply constraints and Russia-related concerns?
The Fed and Russia’s war in Ukraine, according to energy expert Dan Yergin, are responsible for the decline in oil prices during the past month, despite the market’s tightness.
As a result of Russia’s unprovoked invasion of Ukraine, oil prices reached all-time highs, which had been a trend since last year. Since the end of May, however, Brent has declined from over $120 per barrel to roughly $109 per barrel, a 10% decline. In the same time frame, West Texas Intermediate futures have dropped more than 9 percent.
Vice chairman of S&P Global Yergin stated that the U.S. As a result of the Federal Reserve’s decision to pursue inflation even at the risk of tipping the economy into a recession, oil prices are decreasing.
Wednesday, Federal Reserve Chairman Jerome Powell told lawmakers that the central bank is determined to reduce inflation despite the possibility of a recession. It will be difficult to achieve a “soft landing” in which policy is tightened without catastrophic economic conditions such as a recession, he said.
“On the other hand,” Yergin told CNBC’s “Squawk Box Asia” on Friday, “Putin has expanded the struggle from a battlefield war in Ukraine to an economic war in Europe, where he’s trying to generate hardships that would shatter the coalition.”
Russia has restricted natural gas exports to Europe via the Nord Stream 1 pipeline and decreased flows to Italy. Due to a gas-for-ruble payment disagreement, Moscow has suspended gas supplies to Finland, Poland, Bulgaria, Denmark’s Orsted, Dutch firm GasTerra, and energy giant Shell for its German contracts. This issue will impact oil prices.
These measures have fueled fears of a harsh European winter. Now, regional authorities are trying to replenish subterranean storage with natural gas.
Concerning China’s crude oil demand
According to Yergin, the demand prognosis for China, the largest oil consumer in the world, is also questionable.
China has gradually reopened areas of the nation that were recently closed due to an increase in Covid infections. It is uncertain how quickly Chinese enterprises will recover from these economic activity constraints.
Numerous analysts anticipate a sluggish recovery in the near future as a result of significantly more transmissible variations, poorer economy, and diminished government stimulus.
The magnitude of the recovery and reopening will have an effect on oil demand, but this uncertainty has “prevented the [oil] price from increasing,” according to Yergin.
Will production recover?
OPEC+ agreed earlier this month to increase production by 648,000 barrels per day, or 7% of world demand, in July and the same amount in August. This is an increase over the original intention to add 432,000 bpd per month over the course of three months until September.
“We believe OPEC+ will then adopt a more permissive approach and enable the few countries with spare capacity to produce more,” wrote Capital Economics commodities economist Edward Gardner in a Thursday note. He was speaking on OPEC+’s stance after September, when it completes unwinding its pandemic-related supply curbs.
However, markets should not assume that supply would rebound in accordance with this policy, as this factor will affect oil prices.
While production limitations for OPEC+ countries have been steadily relaxed, the majority have failed to increase output in tandem, according to Gardner.
“The majority of other members lack the potential to increase output in the short term. As years of underinvestment continue to plague production, we anticipate that some members, notably Angola and Nigeria, will experience a decline in output over the next few months,” he said.
From diverse news sources, compiled by the research team of PetroNaft Co.