Oil dips

ByDr. Tahseen Mahmood Aslam

Designation: is an educationist with wide experience


August 29, 2022

Dr. Tahseen Mahmood Aslam describes the flux in oil market

The fluctuation in oil prices has become quite frequent disrupting the budget estimates of many countries. The difficulty is compounded by the change in production and supply schedules that are keeping energy managers of many countries on their toes. Oil prices keep on rising and dipping, more dips than rises that have kept many guessing about the next turn of events in the oil markets. The decline in oil prices has worried experts about global economic slowdown that could dampen fuel demand against expectations of tighter supplies toward year-end. The benchmark contracts were headed for weekly losses of about 1.5 per cent that is not a good sign for a tight industry such as oil sector.

While bullish US weekly data bolstered optimism for improved fuel demand for the near-term, lingering recession fears and a possible increase in output by OPEC+ will likely limit oil price’s upside. However, US crude inventories fell sharply as America exported a record five million barrels of oil a day with oil companies finding heavy demand from European nations looking to replace crude from warring Russia. Keeping crude supplies snug, US oil refineries plan to keep running near full throttle this quarter, accordingly as refiners set aside worries about recession and sliding retail prices to deliver more fuel. The rise in US fuel production could partly offset lower oil product exports from China this year as Beijing prioritises the local market to curb domestic fuel inflation.

OPEC representatives commenting on supplies opined that policymakers, lawmakers and insufficient oil and gas sector investments are to blame for high energy prices, not this group. The group together with allies such as Russia, known as OPEC+ is due to meet on 5 September to adjust production. OPEC is keen to ensure Russia remains part of the OPEC+ oil production deal after 2022. In a sign of improving supplies, the price gap between prompt and second-month Brent futures narrowed about $5 a barrel from the end of July.

Record US crude exports, the resumption of Libya’s production and sustained exports from Russia and Iran have eased global supply tightness ahead of peak refinery maintenance. Russia forecasts rising output and exports until the end of 2025 saying that revenue from energy exports will rise 38 per cent this year, partly due to higher oil export volumes. Iran, meanwhile, increased its oil exports in June and July and could raise them further this month by offering a deeper discount to Russian crude for its main buyer China.

In the process, oil hit a six-month low after a brief rally as concerns about the prospect of a global recession that would weaken demand overshadowed a report showing lower US crude and gasoline stocks. Figures did little to improve the economic backdrop, showing British consumer price inflation jumped to 10.1 per cent in July, its highest since February 1982, intensifying a squeeze on households. It is very clear that the oil market is struggling to shake off recession fears, and there is little to suggest that this will change any time soon.

Oil has soared in 2022, coming close to an all-time high of $147 in March after Russia’s invasion of Ukraine exacerbated supply concerns. Prices have fallen since as those concerns were edged out by the prospect of recession. There are growing downside risks as a result of the growth outlook and ongoing uncertainty around Chinese Covid restrictions. An exodus of participants, especially hedge funds and speculators, has made daily price swings far greater than in previous years. On the oil supply front, the market is awaiting developments from talks to revive Iran’s 2015 nuclear deal with world powers, which could eventually lead to a boost in Iranian oil exports if a deal is reached.

The European Union and United States said that they were studying Iran’s response to what the EU has called its final proposal to save the deal. Oil prices whipsawed in recent days, caught in a tug-of-war between supply fears due to Western sanctions on Russia and pressures on indications from central bankers that they will raise interest rates to combat inflation. Also, open interest in New York Mercantile Exchange futures CL-TOT fell to their lowest since September 2015 as investors cut risky assets like commodities, worried that the Federal Reserve will keep raising US interest rates that will have wider repercussions.

This game of highs and lows is deeply impacting the global economic cycle as oil is the linchpin of all activities linked with commerce and trade. Many experts believe that any increase or decrease in the price of oil were both harmful to economic activity and what is needed is a steady supply mechanism and stable price structure so that the shocks are accordingly absorbed because in the absence of such conditions the global economic activity will remain dicey. TW


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