Crude oil prices reversed their earlier gains and fell back to levels seen before the Russian invasion of Ukraine. Despite a drop in US stockpiles and increased supplies from Russia at competitive rates, concerns over global recession hit the investor sentiments.
The threat of the Russian oil embargo spooked the global energy markets earlier. As Russia plays an outsized role in global oil markets amid little spare capacity among other big oil producers, crude prices rose to near record highs.
Oil prices in the benchmark NYMEX futures started the year at $85.5 a barrel, but abruptly skyrocketed to $126 when Russia launched its military operation in Ukraine. However, as investors pored over global economic data, that has spurred worries over potential recession that hurt the energy demand later. From its recent highs, prices have corrected more than 40% so far this year.
Reports suggest that a potential recession in key economies due to persistent and rapid inflation emboldens the Central banks to pursue interest rate hikes. High-interest rates threaten consumer spending and the demand for essential commodities like oil.
The International Monetary Fund recently cut the global growth forecast and raised worries over global recession due to high inflation and the Russia-Ukraine war. As per the agency, global real GDP growth will come down to 3.2 percent in 2022 from an earlier forecast of 3.6 percent. It also cuts the growth forecast of 2023 to 2.9 percent from an earlier estimate of 3.6 percent.
A possible drop in demand from China, the world’s second-largest oil consumer, has led investors to increase their bearish bets on oil. Weak economic numbers and possibilities of imposing more lockdowns to stop the spread of Covid alarming China’s fuel demand.
Oil demand from the US is also under the radar. The growth outlook of the world’s largest economy has also been downgraded by the IMF recently. The US and China together consume almost 30 percent of the total global oil.
On the supply side, Russia is gradually increasing its oil production after sanctions-related curbs. High oil prices have led many Asian buyers to rely on Russian oil, which was available at competitive rates.
At the same time, gasoline and distillate inventories in the US are running low due to a quick domestic demand and strong export. However, to mitigate the same, US refiners are planning to run at full throttle to ensure seamless supplies for the key winter season.
An increase in OPEC output also eases worries of shortage. In the latest meeting, OPEC Plus agreed to raise its output target from September. Earlier, restrictive production policies from the group have created supply tensions. Meanwhile, underinvestment due to a price slump sparked by COVID pandemic has significantly reduced its members’ ability for spare production.
Signs of progress in the Iranian nuclear talk also helped the oil to slip to a six-month low. Due to US sanctions, Iran could not sell oil to the world markets. The country has a capacity to export about two million barrels a day.
Looking ahead the immediate trend is likely to be choppy with a mild downside. However, there is little scope for major liquidation as long as Russia-Ukraine tensions continue. Anyhow, traders will eagerly track the geopolitical and economic sentiments to get a clear direction of the commodity.
(The author, Hareesh V, is Head of Commodities at
)
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