Crude May Stay Elevated, But Falling Demand Holds Out a Little Hope…

Brent remains in a broad range between US$ 95 and US$ 115, and the likelihood of oil prices remaining elevated is high mainly due to the Russian invasion of Ukraine and the related developments. The central value towards which the price has been showing a tendency to converge is US$ 100. While the price has been influenced by the Russian invasion of Ukraine, there have been certain other factors which have also been at play. Russian production of oil is reported to have been reduced by about 10%, which means the supply may be lower from now on. But the reliance of Europe on gas supplies from Russia is what is a critical number, about 17%, while the share of oil supplies is around 7 % to 8 %, and therefore, of not much consequence as such.

As we have discussed in the last couple of issues it may be noted that crude oil prices started moving up from Spt-Oct last year, and therefore, the contribution of war in this price rise may be quite limited. The production and supply expansion by OPEC +, is not a possibility mainly due to capacity issues, and the global oil demand had touched the pre-pandemic levels in Q4 of 2021. These two things contributed to the rise in prices. To sum up, issues arising from potential systemic or structural shortages were causing the price inflation.

But things are gradually evolving in a more logical way. The forecasts for global growth have focused on the likelihood of lower growth this year, and probably next year too. Lower growth means lower demand for oil. In China and India too the sequential growth quarter-on -quarter is lower and lower still. The zero covid policy has led to complete shutdown of two of the major provinces in China, and this may have a negative impact on growth and demand. China is reported to have reduced the refinery operations to cut the output by about 10 %, and this also reflects some slack in demand in future. The more important factor is the decision of the US to release oil from the Strategic Petroleum Reserves (SPRs), about 180 million barrels over the next six months.

Recently, the OPEC reduced their forecast for demand for global oil. Oil demand according to them will be lower by 500,000 barrels per day this year. The International Energy Agency has put the average oil demand to be 99.40 million barrels per day, lower by 260,000 barrels per day from what was originally forecast. All these factors point towards an elevated price level in the immediate term, but gradual moderation over the medium term.



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