Oil prices are still maintaining multi-year high levels despite brief volatility which is projected to continue within the current ranges as the industry battles supply and demand challenges.
Having climbed up to $125.19 last week, the price of Brent decreased to $111.72 a barrel, closing the week at $113.12 a barrel over rising concerns of slowing economic growth and resulting in lower demand.
Brent clawed back some of Friday's losses at the start of the week, rising to $116.25 a barrel on Tuesday as supply concerns offset demand concerns. On Wednesday, it regressed to a low of $107.03 a barrel when global markets weighed the possibility of a federal holiday on fuel tax by the US Administration amid the backdrop of global economic recession concerns.
West Texas Intermediate (WTI) crude surged to $112.47 per barrel before plummeting to $101.58 per barrel during this week.
“Oil prices remain at multi-year highs, and volatility is expected to continue along with what we are seeing in other markets,” Carole Nakhle, CEO of research and training company Crystol Energy, told Anadolu Agency.
According to Nakhle, the risk of a big economic recession has increased, and if it occurs, oil demand growth will be significantly impacted, putting further downward pressure on prices.
“On balance, expect volatility to continue,” she warned.
However, according to Dimitrios Makousis, a research analyst at Strategy International, the drop in oil prices is due to market actors' sentiment rather than fundamentals.
Makousis attributed the current oil price declines to uncertainty and recession fears following the Fed's highest rate increases in decades, “which also impacted equities and will slow the economy and thus influence demand.”
He said although the Biden administration's call for a three-month suspension of the federal gas tax aims to reduce what consumers pay, it could also increase demand, pushing prices higher.
“Of course, there are some other factors that are contributing to this bearish trend to a lesser extent, Makousis said.
He believes that OPEC’s decision to increase output in July and August, following the US efforts to persuade Saudi Arabia, which, along with the United Arab Emirates, has spare capacity to support the supply side, held the price rally back.
“The recent Venezuela-Iran agreement allows Venezuela to re-enter markets following the lifting of American sanctions against Maduro's regime. The US State Department has already authorized European ENI and Repsol to resume Venezuelan crude imports, and deliveries are already underway,” he recalled.
Furthermore, Makousis said, the oil embargo imposed on Russia has redirected exports from Europe to China, India, and other Asian countries, with a 30% discount, thus impacting energy prices.
Makousis described the recent output fluctuations in Libya due to the country's political instabilities as a “noteworthy development” to explain the current supply-side challenges.
After the reopening of the El Sharara and Sarir fields last week, the country revised up its crude oil production for 2022 to 700,000 barrels per day (bpd) from 100,000 bpd.
Makousis said a potential nuclear agreement with Iran would add around 1-1.5 million bpd, helping to balance prices by offsetting the increased demand since the economies reopened after the pandemic.
“The release of oil from the (US) Strategic Petroleum Reserve has also contributed to stabilizing prices,” he added.
Makousis expects the bearish trend to continue in the short term and warned of the many challenges ahead in this volatile era while conceding that long-term forecasting is risky.
“With an ongoing energy war and rising uncertainty. Western governments' attempts to control prices by imposing a windfall tax on oil and gas companies may have unintended consequences. Some oil and gas companies appear eager to withdraw from current or future investments, posing a significant risk to supply,” he said.
Following the Biden administration’s meeting with the heads of seven leading oil refining companies in Washington on gas pricing this week, after a week of contentious back-and-forth discussions with industry leaders, Makousis said oil supply shortages may become more serious after Biden's dispute with oil and gas companies, combined with the energy transition developments.
He further explained that Russia's decreased output to around 1 million bpd, as well as risks of a further decline in its production capacity due to the recent EU ban on technology imports required to sustain the energy sector's operability, are factors fueling fears of a potential supply shock that would lead to a new price rally.
“Another issue is the capacity of refineries to supply oil products and fuels to power the economy. Supply chains have yet to recover from the pandemic, and war only made things worse. If something like this did happen, governments would need to artificially destroy demand. China's zero-covid policy has reduced demand, causing prices to fall,” he said.
Among other factors influencing the course of events, Makousis advised the inclusion of “currently low crude and gas inventories, spare capacity in oil-producing countries, a rise in demand due to summer travel, and President Biden's upcoming visit to Saudi Arabia.”
In the face of a global energy market reorientation, high inflation, recession risk, tight refinery capacity, volatile production capacity due to geopolitical risk, disrupted supply chains, and impact on investment due to energy transition and government policies, Makousis said it would be a far-fetched assumption to say the threat is over and that prices are going to stabilize at low levels.
“Given the current situation, more fluctuations are likely, owing primarily to the growing instability of the international system, which tends to obstruct comprehensive and rational policy decisions,” he concluded.