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Oil's Rollercoaster Ride Continues

Plus500 | Thursday 01 September 2022

As the economy continues to deteriorate amid the rising inflation, the accompanying fears of a recession, renewed COVID-19 restrictions in China, and the seemingly interminable war in Ukraine, Oil seems to be on a slippery slope. This precious energy commodity has been ostensibly losing its vigor in the past few months. 

Oil prices drop

Rate Hikes and Demand Concerns Stunt Oil’s Growth

Yesterday, Oil (CL) recorded its third consecutive monthly decline since the emergence of Covid in 2020. As of the time of the writing, this indispensable commodity has lost a hefty 18% of its value since July ending Wednesday’s trading day below $90 a barrel. One of the main and perhaps obvious reasons behind Oil’s slump is inflation, which has been taking an evident toll on the economies around the globe. As central banks like the Federal Reserve (FOMC) and the European Central Bank (ECB) attempt to fight staggering inflation by raising interest rates, a growing fear over weakening Oil demand seems to be arising, thus causing this decline. To add salt to injury, the central banks’ hawkishness seems to be a far-from-ending motif as Cleveland Federal Reserve President Loretta Mester stated on Wednesday that the rapid interest hikes will continue happening in the near future. Master even posits that it is necessary to hike rates to above 4% yearly in 2023 in order to surmount the recession. Therefore, it might not come as a surprise that such statements have generated jitters surrounding black gold. (Source:Reuters)

Moreover, interest rates aren’t the sole cause behind Oil’s price drop, another prominent reason behind these falls is the renewed COVID restrictions in China. As many parts of the world seem to be recovering from the effects of the pandemic or have dropped the restrictions, China seems to be on a different trajectory. Known for its "zero-Covid" policy, China tightened COVID restraints on Thursday, putting at least 13 million citizens under lockdown in Shenzen. This, accompanied by a reported stagnation in China’s factory activity, has increased the worries regarding lower demand for Oil and energy in its factories and therefore may have led to the drop in Oil prices.

Russia: The Other Side of the Coin

On the flip side, the devastating war between Russia and Ukraine has brought with it a seemingly counter-effect on the prices of Oil. It is true that inflation, recession fears, and Covid restrictions have certainly deteriorated Oil's status, but concerns that Russian crude would be shut out of the market by sanctions may have lifted them from time to time. Since the Russian attack in late February, 130 million barrels of crude have been drained from Gulf Coast government caverns, and the government's oil stash ended last week at its lowest level since 1984. (Source:The Wall Street Journal)

Accordingly, the fears of tight global supply due to sanctions on Russia (Europe’s biggest energy supplier), on the one hand, and the fears of a weaker fuel demand brought by interest rate hikes have caused Oil to be on a rollercoaster; rising on the one hand and declining on the other. Nonetheless, in the meantime, analysts are noting rate hikes and Covid restrictions may be overshadowing the influence of the Russian energy market.  

Another Player in Oil’s Field 

The list of factors that could slow down Oil’s progress does not seem to fall short. More uncertainty surrounding Oil’s trajectory seems to be looming as renewed nuclear talks with Iran may be on the agenda.  At a press conference in Ukraine, Iranian Foreign Minister, Hossein Amirabdollahian, said that a deal to renew the 2015 nuclear deal between Iran and the USA  and other world powers may be feasible if Iran gets what it demands. If indeed, the revival of the nuclear deal comes to fruition, then the price of Oil could shift dramatically as it would render with it a large return of Oil to international markets. This is because Iran is considered the third-largest Oil producer in OPEC+, and therefore, market analysts claim that if the revival happens, OPEC would easily be able to produce 30.5 million Oil barrels per day. In such a scenario, Oil prices could dip massively. (Source:CNBC)

Whereas in the meantime black gold seems to be on a slide caused by the cocktail of factors mentioned above, the market is known for its volatility and since past performance is no guarantee of future prices, whether or not Oil would rebound soon is still unclear. Traders and investors alike would have to keep an eye out on the market and the political sphere to see how these factors come into play. 

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