What’s Next for the Oil Market?
One of the key drivers of the global economy seems set for yet another turnaround. As demand for Oil waxes and wanes with the tides of the overall health of the marketplace, the cost of black gold has seen several peaks and valleys in recent times. After a steep drop at the end of last week, hitting a four-week low, Oil prices are holding steady Monday morning.
Over the course of 2020 and 2021, demand for Oil suffered huge losses at several points as various variants of the COVID-19 virus paralyzed business activity across most of the industrialised world. At one point in April 2020, Oil’s price per barrel even went negative, when storage facilities held more petrol than they had capacity for and were forced to pay others to take it off their hands.
2022 has not been free of worries for the Oil market either. While prices have been buoyed by the fear of supply disruptions due to the conflict between the Russian Federation and Ukraine, coronavirus lockdowns across urban centres in China cut off a reliable source of demand for petrol producers.
However, the general trend line for Oil (CL) this year has been positive: this Commodity’s price per barrel is up 41% so far this year, as of the time of writing. International benchmark Brent Oil (EB) has also marked a 42.7% rise since the beginning of January. Not all can be presumed pleased at this market development, as high prices at the pump are also a strong driver of the record inflation rates observed in the United States in recent months.
Friday’s Fed Fall
Despite 2022’s upward climb in the cost of petrol, steep drops were seen on the Oil market last Friday. With the Federal Open Market Committee having raised interest rates by the highest single jump since the mid-90’s, some are beginning to raise the spectre of a looming recession.
Much as was observed in 2020, a broad-based retreat of business activity in the United States and elsewhere would presumably deal a heavy blow to demand for petroleum. Accordingly, it may not have come as a complete surprise that Oil and Brent dropped by about 7% and 4.6% respectively last week as jitters spread across trading floors.
However, according to market analysts, demand for black gold is set to remain steady at the moment. Global supplies of petroleum are under a cloud of uncertainty as continued military hostilities in Ukraine bring a potential wholesale embargo on Russian-sourced Oil ever closer to realisation. While OPEC+’s most recent meeting on June 2nd concluded with a re-affirmation of the decision to increase production capacity, expert consensus seems to be that demand will continue to outstrip supply over the near-term. Yesterday, American Treasury Secretary Janet Yellen even stated her belief that high prices at the pump are here to stay, at least for the next six months.
Far from the Oil fields of Siberia and Saudi Arabia, another factor could influence Oil’s price movements in the near future as well. While the world’s second-largest economy has been widely covered due to its high demand for petroleum, and thus outsized effect on the global cost of Oil, China has heavily underutilised production capacities as well.
Despite the fact that stay-at-home orders in Shanghai and Shenzhen have already been rescinded, some sectors of the Chinese economy have yet to recover from this spring’s coronavirus outbreaks. Up to one-third of the country’s refining facilities are currently lying idle.
The country’s capacity for refining Crude Oil into that which can be used to fuel its massive domestic demand has been expanding rapidly in recent years, and could eclipse that of the United States soon. However, Chinese state policy remains focused on satisfying national demand for black gold rather than taking advantage of potential income from exports. Therefore, despite the great potential locked in massive mega-refineries throughout the country, it seems unlikely that Chinese refiners will act to increase production for export and thus help to mitigate Oil’s price rises over the near-term.
While both Oil and Brent Oil have remained relatively steady so far today, a host of different factors could push the petroleum market in a different direction in the near future. Supply disruptions, a global recession, or an increase in production could all have their effect, but in the end, traders will have to wait and see.