Oil Drops From Near 14-Year Peak to Below $100

Oil prices have marked a considerable turnaround over the past week, with crude’s price per barrel dipping below $100 as of the time of writing. While this represents a significant drop in black gold’s price per barrel since it neared a 14-year high last week, some market analysts say consumers aren’t out of the woods yet.

Petrol Cools Down

Crude Oil (CL), as well as international benchmark Brent Oil, had been on an uptrend so far this year. From the beginning of 2022 until March 8th, the prices of both rose by more than 64%.

Last week, petroleum prices crested as investors pondered the potential fallout from the strengthening sanctions regime imposed on the Russian Federation in response to the country’s military engagement on the territory of its neighbor to the south, Ukraine. While Oil pumped in Russian territory provided only one-tenth of American energy supplies prior to the embargo’s imposition, European nations are generally much more dependent on petrol sourced to the east. 

While U.S. President Joe Biden announced on March 8th that his country would no longer be importing Russian Oil, getting the EU to join the embargo could prove a much more difficult proposition. Robert Habeck, the economic and energy minister of Germany, Europe’s largest economy, has indicated that cutting off petrol imports from the Russian Federation could have dire economic consequences for his nation’s citizens’ standard of living.

While Oil almost hit a 14-year high price per barrel last Sunday, this week has marked a sharp turnaround for one of the world’s most crucial Commodities. As of the time of writing, Oil is trading down 4.6%, while Brent Oil (EB) is down by just under 5%. The two have both dropped by 22% since last week’s peaks. While the consequences of this drop are as yet opaque, some market watchers have pointed to two main factors that could have spurred the selloff.

Lockdown Clouds Outlook

While news coverage of the conflict in Ukraine may have seemingly eclipsed reports on the continuing COVID-19 pandemic, China may be entering a new wave of coronavirus infections. On Sunday, authorities in the world’s most populous country placed the nearly 18 million residents of southern city Shenzhen on total lockdown in response to rising infections. Some posit that Oil investors’ decisions on the trading floor could have been influenced by the restrictions, as they downgrade their predictions for petrol demand’s near-term trajectory.

Shenzhen and its wide array of factories form a key link in global supply chains; accordingly, a halt to economic activity emanating from the metropolis could have outsized effects on the global economy. With export supplies stymied, the world’s economic growth could be limited, thus decreasing demand for Oil. 

Federal Fiscal Fears

While the average consumer in the United States is surely feeling the pinch of high petrol prices at the pump, continuing high inflation across the American economy as a whole could have the Federal Open Market Committee looking to take more drastic fiscal measures than previously expected. 

On Wednesday, Federal Reserve Chairman Jerome Powell will announce the results of the committee’s deliberations with regard to American monetary policy. Market expectations seem to be that the Fed will move to raise interest rates for the first time since before the pandemic. Even amid global geopolitical uncertainty, many analysts don’t foresee America’s central bank being diverted from its hawkish course. Some are even predicting five interest rate hikes over the next nine months.

While nothing is for sure yet, a significant tightening of U.S. monetary policy could indirectly decrease petroleum demand in the near-term as economic actors readjust to the end of the ‘easy money’ era. These considerations may have been present in the minds of those making petrol deals this week, leading them to decrease their expectations for Oil demand in the United States.

So far, 2022 has been full of ups and downs for global markets, and the petroleum trade has been no exception. Whether Oil’s latest downturn is sustained or whether another rise is in store for consumers in the warmer months as some analysts predict is yet to be seen.