Brent – Supply Constraints Support Elevated Prices Now…

The lockdown in Shanghai has hit the oil demand in China. This is the fourth consecutive month when the demand for crude oil has declined in China. The trend is set to remain intact till Shanghai is re-opened after the pandemic fear subsides. There is rising inventory of jet fuel, and the refinery output is lower by close to 1 million barrels per day, in the recent months. Crude demand is progressively coming down and on a year-on-year basis it has dropped by 4.50 % since the beginning of this year. The forecast on the future rise in demand is also a bit grim. Future demand growth always depends on economic growth and GDP growth is expected to come down to 3.50% to 4.00 %. But there is some hope for oil prices based on the prospects of the re-opening in China and the subsequent pick up in prices.

Brent currently at US$ 112, is likely to remain firm due to a number of factors. The first is that there are internal disruptions in Libya and the riots and related violence is likely to impact oil production and supply. Second, Hungary while completely in alignment with the rest of Europe on denouncing the Russian invasion of Ukraine has not come to an agreement with EU on oil sanctions against Russia. If it comes through, and Hungary joins in, then oil prices may go up. Third, the obvious hesitation as well as the inability of OPEC plus to substantially enhance the production and supply also may support higher prices. All these factors point towards a situation of prices remaining elevated for a longer than expected period. There are two factors which may attempt to draw the prices in the opposite direction. The first is the strength of the US Dollar and the second is the probability of global growth declining more than estimated.

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