Oil is beginning to stop being an inflation factor. The raw brent, the European benchmark, fell more than 5% to lows since early January in this Monday’s session, in an attempt to ease the decline in the latter part of the day. As is almost always the case with a contraction of this magnitude, the causes are varied: from fears that the Covid outbreaks will ruin the timeline for China’s economy to reopen, to a slowdown in activity in the West, which is – mainly – due to the possibility come that the Organization of the Petroleum Exporting Countries (OPEC) will increase its supply in a drastic departure from the previously pursued line.
The oil market moves primarily on expectations. And within weeks, they all seem to be pointing in one direction: that of languishing demand, insufficient to sustain the demanding prices of recent times. Gone is the nearly $130 in early March, just days after Russia invaded Ukraine. Also the 120 at the beginning of the summer when everything pointed to a long period of high oil prices. That perspective was watered down in record time.
The currently just over 80 dollars are still above the average of the last few years, but – in combination with natural gas also stinging downwards – indicate that inflation will land faster than expected. The correlation between oil and the broader price index is particularly strong in the US, where the depreciation is fueling a softer tone from the Federal Reserve in upcoming interest rate meetings.
Last week both OPEC and the International Energy Agency (IEA, dependent on the OECD) revised downwards their expectations for global oil demand, a pitcher of cold water for those who thought the drums of recession in Europe and the USA would hardly reduce crude oil consumption. The surge in coronavirus cases in China and the renewed tightening of entry requirements into the world’s most populous country have added an additional point of pessimism about demand.
Crude Oil has had consecutive fear sessions in the red session after session. But the ultimate trigger for the sharp drop recorded this Monday was the publication of the American newspaper The Wall Street Journal —the bible of business in the first world power—, on a potential increase in supply by half a million barrels a day by OPEC.
The Saudi-led cartel’s possible script change is being interpreted as Riyadh’s attempt to please the US – which has been demanding a reopening of the oil tap for months – after several clashes. And it’s a surprise for two reasons: because it would come at a time of significant easing in prices, and because after consecutive falls, expectations swung in the opposite direction.
One piece of information perfectly summarizes the current development in the oil market: Between early July – in the initial phase of price de-escalation – and mid-November, mutual funds sold the equivalent of 59 million barrels of crude oil in futures and options on crude oil and refined products, according to figures compiled by Reuters . They had bought the equivalent of 169 million barrels in the previous six weeks, which had been dominated by sharp increases.
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