Oil prices are falling due to lower demand
2022.12.08 10:06
Oil prices are falling due to lower demand
Budrigannews.com – As the threat to production posed by the G7 Russia price cap has diminished, traders have been able to refocus on the deteriorating outlook for consumption, resulting in a drop in global oil prices of more than 20%.
Prices for front-month Brent futures have fallen from a recent high of over $98 on Nov. 4 to less than $78 per barrel.
From a backwardation of more than $8 during the same time period, Brent’s six-month calendar spread has swung into a contango of 50 cents per barrel.
A cyclical downturn in the oil market and the onset of a business cycle slowdown or recession are consistent with the collapse of spot prices and spreads.
Chartbook: The explosive cyclical upswing in both the economy and oil that began in the second quarter of 2020 following the first wave of the coronavirus and lockdowns appears to have reached its peak in the second quarter of 2022.
The majority of indicators since then have indicated a slowdown in economic growth and oil consumption, with declines in some regions: * Due to Russia’s invasion of Ukraine, sanctions, and their reliance on costly energy imports, the United Kingdom and the European Union have experienced the most severe slowdown and entered recession.
As a result of the cycle of city-level lockdowns implemented to control the spread of the coronavirus, China has also experienced a significant slowdown and is likely in recession. * Although it has avoided recession, the United States has experienced the mildest contraction, focusing on consumer spending, manufacturing, and freight transportation.
As a result, growth in petroleum consumption has slowed down, putting less pressure on inventories and cooling prices significantly.
More Turkey says it will continue blocking tankers
Through their impact on inflation, interest rates, and consumer spending, high prices for oil and other energy sources themselves contributed to the overall economic slowdown.
Due to extremely high prices and a slowing economy, global oil and energy consumption has been falling since the third quarter.
However, concerns regarding the anticipated introduction of a price cap on Russia’s exports of crude and refined products initially obscured the impact.
The price cap and Russia’s response, according to traders, would reduce production more than the slowdown in the economy would reduce consumption.
Despite the increasingly bleak economic outlook, worries about the impact maintained and even increased prices throughout October.
However, as of the beginning of November, it became increasingly evident that the cap would be implemented at a relatively high level with looser enforcement.
In keeping with previous downturns in the global business cycle, the unmasked deterioration in consumption led to a sharp drop in prices and spreads. The rapid decline in prices was likely anticipated, accelerated, and exacerbated by the readjustment of investors’ positioning.
Mutual funds and other cash administrators cut their joined situation in the six most significant petrol prospects and choices decreases by what could be compared to 190 million barrels between Nov. 8 and Nov. 29.
During this 21-day period, positions were reduced by the equivalent of 139 million barrels, causing the majority of the reduction.
On November 29, investor positions in Brent were reduced from 238 million barrels (50th percentile) on November 8 to just 99 million barrels (the sixth percentile for all weeks since 2013).
Since the majority of fund positions are in contracts closest to delivery, where liquidity is greatest, the liquidation has weighed particularly heavily on the front end of the futures curve, accelerating the transition into contango.
According to Reuters in January 2015, “A brief history of the oil crash,” the recent decline in oil prices shares some characteristics, but not all of them.
The threat to production posed by the civil war in Libya and the rapid advance of Islamist fighters toward the oilfields of northern Iraq in 2014 obscured the deteriorating consumption environment.
Spot prices and calendar spreads fell rapidly in July as those threats began to ease, with the liquidation of previously bullish hedge fund positions accelerating and amplifying the decline.
When Saudi Arabia, Russia, and American shale producers all refused to reduce production and engaged in a volume war for market share, the inevitable decline in prices became a slump.
More Gas prices in Europe are unstable
Since the shale revolution in the United States has come to an end, there won’t be as much of a volume war for market share in 2022/23, so prices won’t fall as much this time around.
Additionally, it is possible that the recent liquidation of hedge funds exaggerated the drop in oil prices, allowing for a short-term rebound; The number of open positions is now unusually low.
However, the fundamental dynamic is clear and simple to comprehend: Prices and spreads fell sharply as the underlying deterioration in the consumption environment was revealed as production threats diminished.
