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What Can Drive Oil below $90 a Barrel?
2022-08-12 • Updated
The past two years have seen the biggest swings in oil prices in 14 years. This rollercoaster has baffled markets, investors, and traders. The main reasons for such dynamics were geopolitical tensions and the shift towards clean energy. In the last two years, oil traded as cheaply as $19 a barrel - or at minus levels if you're looking at WTI futures - and it went up to $139.
We haven't seen such huge swings in oil prices since the 2008 financial crisis when oil collapsed from $150 to less than $40. The collapse was due to the fears of a global recession, which led to a drop in oil demand as in our current situation.
Reasons why are oil prices volatile now
- The COVID-19 pandemic, the following lockdowns, and their consequences that we are suffering from now.
- Shift towards clean energy and reducing harmful emissions.;
- Lack of investment in new oil projects due to the high cost and low demand.
- OPEC + policy, massive supplies cuts, and the following attempts to re-pump these supplies into the market.
- Above all, the unpredictability of Russia's actions and the fate of Russian oil.
The result was a sharp rise in inflation amid sluggish demand, slowing economic growth, and growing recession fears.
Two cases for oil to slide below $90
Oil prices may drop to $90 a barrel if the world's largest oil consumers continue to struggle with high inflation and low growth.
- If the United States continues to suffer from high inflation, which leads to a slowdown in economic growth and a decline in demand with higher prices for fuel and services for consumers, and fears that the US economy will enter a recession.
- If China cannot find solutions to its economic problems and the repeated shutdowns that threaten its production and growth, which in turn affects the global economy.
Oil may drop below $90 and stay around this range for a while. Economic woes in the world's two largest economies will affect oil demand. The effects will, of course, be seen on Brent and US WTI prices.
A case that may support oil
At the same time, oil demand may find some support from record high natural gas prices, especially in Europe. That will prompt consumers and factories to switch to oil-fueled generation to survive the brutal winter ahead. In addition, the oil supply is not expanding and may even face problems in the coming period as oil demand increases in the winter.
Supply concerns are expected to escalate as winter approaches, as EU sanctions banning sea imports of Russian crude and oil products are set to take effect on December 5. The modest increase approved by the OPEC+ of 100,000 barrels per day in September will not be enough to meet the increased demand.
Technically, Brent (XBRUSD) may drop to 80.00 if it breaks below $90 and settles below that level.
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