Oil markets were under considerable pressure last week.
Both Brent and U.S. West Texas Intermediate (WTI) crude oil prices fell, with Brent futures settling at US$96.72 and WTI ending at US$90.77 per barrel. Both benchmarks fell about 1.5 per cent on the week, as future contract values dropped to their lowest level in seven months earlier in the week.
Persistent Russian oil output, speculations of progress on an Iran nuclear agreement, lingering concerns about recession in major global economies, dismal economic data out of China – the world’s largest crude importer – the possibility of demand destruction and a stronger dollar were enough to keep the oil markets in a check.
Most analysts now expect the bearish trend to continue for some time.
Weaker-than-expected demand growth means the oil market is likely to remain in surplus into early next year, which should limit a rise in oil prices, Barron’s reported on Aug. 19.
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Barron’s report forecast lower prices in third-quarter 2022 and fourth-quarter 2022 Brent: the price is expected to fall from US$118 a barrel and US$125 a barrel to US$100 and US$97. The full-year 2023 Brent forecast has been revised from US$99 a barrel to US$97 a barrel.
And despite the United States and European Union sanctions, Russia has stubbornly maintained its crude oil output, adding pressure to oil markets. Russian oil exports are still robust: the International Energy Agency reported 7.4 million barrels a day in July early this month.
The negotiations between the U.S. and Iran on a nuclear deal, and the renewed possibility of an agreement, are also applying bearish pressure on oil markets.
“Any such deal would undoubtedly involve removing Iran oil sanctions,” Ryan Fitzmaurice, commodity index trader at Marex North America, was quoted as saying. “Speculators don’t want to get caught wrong-footed in the event of a key announcement.”
China’s uncertain economic outlook is also sparking concerns about global demand, Ole Hansen, Saxo Bank’s head of commodity strategy, told the media.
“It looks as if the macro has the upper hand over the micro at this stage. We have continued headwinds from the risk of an economic slowdown as central banks continue their efforts to bring down inflation by killing demand through higher rates,” he added.
Continued Russian exports and weaker-than-expected demand “should limit the upside in prices,” analysts at ING Bank predict. The bank lowered its forecasts for fourth-quarter international crude prices to US$97 a barrel from US$125.
A stronger dollar is also impacting crude market sentiments. The “extended strong dollar trends will pose a major headwind against sustainable oil price gains,” according to Jim Ritterbusch of oil trading advisory firm Ritterbusch and Associates.
But not everyone agrees. The new secretary general of the Organization of Petroleum Exporting Countries (OPEC), Haitham Al Ghais, disagrees with the bearish sentiments. “In the physical market we see things much differently,” he told Reuters last week. “Demand is still robust. We still feel very bullish on demand and very optimistic on demand for the rest of this year.
“The fears about China are really taken out of proportion, in my view,” said Al Ghais, who worked in China for four years early in his career. “China is a phenomenal place of economic growth still.”
To be fair, energy markets tend to defy projections. New York Times national energy business correspondent Clifford Krauss wrote on Aug. 15 that several events could alter the trend.
“China, where COVID-19 lockdowns remain widespread, will eventually reopen its cities to more commerce and traffic, increasing demand. Withdrawals of oil from the U.S. strategic petroleum reserve will end in November, and it will need to be refilled. And a single unexpected event – say, a hurricane flooding the Houston Ship Channel and taking several Gulf of Mexico refineries out of commission for weeks or even months – could send fuel prices soaring,” Krauss underlined.
So uncertainty remains fundamental in the crude oil markets.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
For interview requests, click here.
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