(ORDO NEWS) — In the past two months, oil prices have been falling after a sharp jump caused by the start of a military special operation in Ukraine, writes Business Insider. This is due, among other things, to stable production in Russia and weakening demand, the author of the article explains.
Oil prices are slowly falling again after a spike caused by the start of the Russian military operation in Ukraine, much to the relief of politicians, companies and drivers around the world.
Oil of the American grade WTI has fallen in price by 28% from the peak values, which were recorded in early June, and on Wednesday its price reached $90 per barrel.
Benchmark Brent is down 24% from its June high to trade at $95 a barrel on Wednesday. Since March, when its price reached a record high of $140 per barrel, it has fallen in price by more than 30%.
Why are oil prices falling? This decline is due to three factors: fears of a possible recession, the stability of production in Russia and weakening demand. However, no one can say for sure what will happen next.
The global economy is slowing down
A key factor driving prices down is growing fears that the world’s major economies could plunge into recession next year. When economies slow down, energy demand naturally declines.
The U.S. economy contracted for two straight quarters in the first half of 2022, according to data released in July. Currently, the United Kingdom and the Eurozone face the threat of a severe recession.
“The talk of an economic downturn has been affecting oil prices all summer, requiring a significant adjustment that will be welcomed by those who are terrified of having to fill up their cars,” said Craig Erlam, senior market analyst at the platform. Oanda.
Some experts say that the strength of the dollar has also affected global demand, driving down prices. According to this theory, since oil is traded in dollars, the surge in the value of the US currency has made this commodity prohibitively expensive for some buyers.
Russia continues to produce large volumes of oil
Another factor that analysts pay less attention to is that Russian production is holding up at a higher level than many expected.
Sanctions imposed on Moscow over its actions in Ukraine have caused many to sharply lower their expectations for Russian oil production, causing traders to drive up prices.
However, the expected decline in Russian production has not manifested itself so far. Moscow increased sales to India and China, while domestic demand remained strong throughout the summer. That is, there was more oil on the market than previously expected.
“The market consensus on Russia’s ability to redirect oil flows to buyers was too pessimistic,” JPMorgan analysts explained in an information note.
American drivers prefer to stay at home
On the demand side, the current indications are that the need for oil has not been as strong as many expected, even before the projected slowdown in growth. For example, last month the US Energy Information Administration reported that the first week of July saw the lowest seasonally adjusted demand for gasoline since 1996.
Meanwhile, analysts say President Joe Biden’s decision to unload strategic oil reserves to curb rising gasoline prices has also contributed to some of the cheapening of oil.
Analysts are divided on what to do next
Wall Street analysts have not agreed on whether oil prices will continue to decline or whether they will start to rise again.
Analysts at Citigroup believe that by the end of the year, prices could fall to $65 if a severe recession hits the global economy. In the absence of such a recession, oil prices could drop to about $85 by the end of the year, they predict.
Goldman Sachs lowered its forecasts this week, but said it still expects oil prices to pick up again, not least because its analysts say demand is now higher than many think. Bank officials predict that Brent crude will rise to $110 in the third quarter and to $125 in the fourth.
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