2022-06-24 • Updated
Yes, oil prices are burning right now, and, as a result, inflation is getting hotter worldwide. However, oil's bullish momentum is under threat. Below we've listed the factors that may cool the demand for the commodity.
1. Lockdowns in China
The drop in oil prices has accelerated since April 25 after Beijing closed some public places and stepped up mass testing to avoid a complete lockdown like the one in the global business hub Shanghai since the beginning of the month. The latest shutdowns have disrupted factories and supply chains, raising concerns about the economic growth in China, the world's second-largest economy, after the worst outbreak in two years. This will lead to a slowdown in oil demand since China is the largest importer of oil in the world. The lockdowns will likely reduce China's oil demand by 1.1 million barrels per day in April.
2. Supply is still here
Any projected oil deficit in the third quarter will be small and can be filled by increased OPEC production as oil demand growth continues to decline and global economic growth weakens. Moreover, the market is not entirely in deficit and could even post a small surplus in April. Balancing demand and supply will be more difficult in the third quarter and beyond, as the decline in China's demand is expected to be temporary. In contrast, the drop in Russian oil production will continue for longer.
3. Lower intraday trading ranges
While volatility in the energy markets remains high, there are signs that it's declining, with intraday trading ranges also pointing lower. Brent crude appears to be in the latter stages of its third wave since Russia's invasion of Ukraine. The amplitude of the trading waves is declining. The first wave range was $43 per barrel, the second was $23/bbl, and the third was $14/bbl.
4. Inflation will calm energy prices
With inflation continuing to stifle global economic growth, markets are worried about a possible recession resulting from higher energy prices and the Russia-Ukraine war. The war and rising inflation will destroy the demand for oil. As consumer spending declines and production and demand slow, energy prices will fall. The IMF cut its forecast for global economic growth by nearly a full percentage point.
It's necessary to remember the factors listed above and monitor the situation. In general, however, the bulls still have the upper hand over oil and natural gas, despite all these mixed signals that may threaten the bullish momentum but not stop it.
China has issued new oil product export quotas to allow oil companies to send surplus barrels overseas, particularly Sinopec, which has the highest volume among quota holders. While the exact quota volume remains undisclosed, oil companies are forecasted to export approximately 3.5 million metric tons of clean oil products in September, a 10% increase from August.
Thanks to the incredible advancements in horizontal drilling and fracking technology, the United States has experienced a mind-blowing shale revolution. They've become the heavyweight champion of crude oil production, leaving Saudi Arabia and Russia in the dust. They even turned the tables and became net exporters of refined petroleum products in 2011.
Oil prices rebounded slightly on Friday but are still expected to show losses for the week due to concerns about slowing growth in the US and China. US crude futures rose 2.7% to $70.41 per barrel, while the Brent contract increased by 2.5% to $74.33 per barrel.
The past several weeks have been a real triumph for the bulls in the oil market. The Brent spot price grew by 8.5% during the last month.
Gold prices are rising for three consecutive days ahead of the Federal Reserve (Fed) interest rate decision, which is expected to remain unchanged due to declining inflation and a positive economic outlook. Investors are keen on the Fed's interest rate guidance, fearing a hawkish stance that could trigger market risk aversion.
Amid concerns of a Chinese economic slowdown, reports of declining investment often overlook China's efficient investment strategy in emerging sectors for long-term growth. China has taken measures to stabilize foreign and private sector investments, like reducing the reserve requirement ratio to boost investor confidence.
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