The Price of Oil has plummeted 30% in a week.
What. The. Heck.
Following Russia’s invasion of Ukraine, global oil prices skyrocketed.
Brent crude jumped above $139 per barrel just over a week ago. Analysts predicted that prices may hit $185, then $200 as traders shied away from Russian oil, driving up inflation and putting a burden on the global economy.
Since then, however, there has been a sharp turnaround. Brent crude prices, the global benchmark, are down nearly 30% from their high. After losing another 7% on Tuesday, they’re now trading below $100 per barrel.
What’s going on: The unusually fast reduction has been fueled by optimism that Saudi Arabia and the United Arab Emirates will increase oil production, and that Chinese consumption will fall as a result of new coronavirus restrictions in large cities. This would help to relieve the market’s stress.
Analysts warn, however, that we are not yet out of the woods. Oil is still selling at a considerable premium to its cost of production, and severe fluctuations are expected to continue in this period of great uncertainty.
“I wouldn’t rule out $200 per barrel just yet,” Bjrnar Tonhaugen, Rystad Energy’s head of oil markets, is quoted as saying. “It’s far too early.”
Oil prices soared after the invasion, as traders began to see Russian petroleum exports as untouchable. This has generated concerns about how that supply of 4 to 5 million barrels per day would be replenished, especially when demand for gasoline rises throughout the summer.
Investors, on the other hand, appear to be questioning if they went too far, too quickly in the last week. The UAE’s ambassador to Washington stated that the government wants to expand oil output, raising expectations that the Organization of the Petroleum Exporting Countries, or OPEC, could finally interfere. Meanwhile, despite the ongoing conflict, Russia and Ukraine continue to communicate.
In the near run, China’s resolve to preventing the spread of Covid-19, which has resulted in a lockdown in the tech capital of Shenzhen and new regulations in Shanghai, might mean the country requires less energy. On a daily basis, China imports roughly 11 million barrels of oil.
“People realized we’re still in the middle of an pandemic,” Tonhaugen explained.
Why it matters: The decline in oil prices has helped keep gasoline costs in the United States from rising. For the time being, they’ve leveled down, albeit a gallon of petrol still costs over $4.32 on average.
While $100 per barrel of oil is still quite costly, if prices continue in that range, it may alleviate some concerns about inflation speeding up.
Policymakers would probably feel a sigh of relief.
Investors, on the other hand, appear to be uneasy as they analyze the fallout from Russia’s incursion. Russian oil continues to trade at a $26 discount to Brent.
Analysts feel the course of events has been determined.
According to Giovanni Staunovo of UBS, oil will trade at $125 a barrel by the end of June. Tonhaugen of Rystad Energy, for one, believes that while the war progresses, prices will continue to break records.
He explained, “This is the calm before the storm.”
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