Inflation takes a bite out of oil prices
Oil markets experienced a bout of economic turbulence today and could be in for a bumpy ride in the short term.
Inflation and central bank strategies to get prices in check by curbing demand are increasing the likelihood of a recession and dragging oil prices down with it.
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Despite best efforts, attempts to dampen demand and rein in inflation have not only encouraged a growing consensus that a recession, technical or full, is on the horizon but also strengthened the dollar, which limits the ability of oil-importing countries to stock up on pricy crude and crude products.
If a recession materializes and inflation continues to push prices for almost everything higher, oil demand is almost certain to fall, bringing prices with it.
WTI and Brent fell more than 10%, with WTI dropping below $100 per barrel for the first time since April 2022, a psychological sell-off level for many traders who are penciling in an economic downturn of some degree and consequent imminent drop in oil demand.
Today’s market moves reflect what oil traders believe the market conditions will be in September, which could be weighed down by not only a seasonal demand slump but weaker consumer demand overall.
Inflationary forces and central bank intervention are stoking the fears of a recession and economic slowdown in major fuel-consuming economies.
Market players are slowly coming to terms with the prospect of this bull cycle, which has lasted more than two years, may be coming to an abrupt end.
After two years of a global pandemic, this summer promised that pent-up savings would manifest in a spending boom, but recession fears are dashing those hopes.
The risk of a downturn has investors – both financial and retail – preferring to hold onto cash as the recession, whether full-blown or technical, plays out.
Our real-time road and aviation demand tracking show a timid, but stable upward trend globally, but both industries are at risk.
Gasoline and diesel are at record-high prices, and the markets could soon see demand destruction as consumer elasticity turns negative.
The aviation industry has been in a negative spotlight lately, as the industry faces significant logistical challenges such as labor shortages, worker strikes, delayed maintenance, and logistical issues sourcing parts.
To add salt to the industry’s wounds, jet fuel is in the same precarious position, and prices are soaring.
Flattish refinery runs trends out of Asia, China in particular, also signal that the expected uptick is still very much in formation and not a certainty.
The projected increase is dependent on the on-time capacity start-ups, governmental policy on Covid-19 lockdowns, and any ad-hoc export quota limitations.
The demand signals are challenging to read as the growth in demand after Covid-19 is mixed in with the impacts and market reaction of an expected economic downturn.
The Russia-Ukraine war still impacts oil markets and is a crucial factor supporting high prices.
If the war continues, it will only exacerbate the energy crisis and price inflation in Europe, which could slash oil demand in the year’s second half by 800,000 bpd.
The supply-side pressure, in particular from outages in Libya, Ecuador, and Nigeria, is not balancing out an ever-resilient Russia, which has shaken off the taboo in selling oil, with heavy discounts opening up new markets and bringing crude oil production closer and closer to pre-invasion volumes of 10 million bpd.
On the bearish side of the coin, a more accelerated trajectory towards economic downturn and associated oil demand destruction of 1.3 million bpd in the remainder of 2022, paired with resilient Russian supply and OPEC+ raising production after September, could yield a reality that sees a not so soft landing towards $55 per barrel by December 2022, versus our current base case of Brent finishing out the year at $105 per barrel.
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