Oil prices were down on April 24 as traders believe economic recovery will be slower than expected hurting global oil demand. A decision by OPEC+ to cut production at the beginning of April aimed at supporting the stability of the oil market had led to oil price increases but recently prices have dropped as concern over the global economy and fuel demand outlook outweighed the prospect of tightening supplies.
“There is an expectation – I’m not quite sure I’d believe it – that other sources have made sure that countries requiring extra supplies will be able to cover the missing amounts they were getting out of Russia,” Justin Urquhart Stewart, co-founder of Regionally in London, told NE Global, adding, “Although the economies are recovering, they’re recovering at a much slower rate than expected and therefore the demand is rising, but not as fast as they were expecting. There was a dash of optimism and that pushed the price up; that’s now being pulled back because the demand is not as strong, and because they found alternatives to bring that price back further. I wouldn’t trust it at the moment because that could change very quickly indeed.”
The Organization of Petroleum Exporting Countries, or OPEC, and its oil-producing allies, including Russia, agreed on April 2 to widen crude oil production cuts to 3.66 million barrels per day (bpd) or 3.7% of global demand. OPEC said in a statement at the time that this is a precautionary measure aimed at supporting the stability of the oil market.
OPEC+ had not been scheduled to hold a formal oil ministers’ meeting until June. The London-based analyst said the surprise cut was spearheaded by OPEC-kingpin Saudi Arabia and its oil minister, Prince Abdulaziz bin Salman, who acted pro-actively and wants to keep prices high to fuel the kingdom’s economy.
There are also political issues behind the move. Riyadh gave Washington the heads up before announcing the cut on April 2. Last year, US President Joe Biden made a special request to Saudi Crown Prince Mohammed bin Salman to boost oil production, but bin Salman does not want to be seen as kowtowing to American requirements the entire time.
Higher oil prices also help the Russian Federation which is finding alternative ways of exporting crude and particularly by transferring oil between tankers outside international waters. Russia is still incredibly short of available cash meaning it will be very expensive for Moscow to continue its war against Ukraine.
EU oil stocks
After the EU banned imports of Russian crude and products, member states have strived to find alternative crude suppliers, including the US. EU countries are required to maintain emergency stocks of crude oil and/or petroleum products equal to at least 90 days of net imports or 61 days of consumption, whichever is higher, which can be used in case of a disruption to supply.
Asked if he expects oil prices to remain steady or peak later this year, Urquhart Stewart said, “We might well see further weakness, but not an all-stop. You’re going to see some volatility, and a lot of that would depend on the perception of how the war in Ukraine is going and economic recovery in the US. The inflation rate in the US is coming down, the interest rate pressure is easing off, meaning demand might be improving. However, I think the recovery is going to be weak, so any recovery in the oil price will be short-lived.”
China’s slow economic recovery after COVID-19 is also dimming global oil demand prospects. But this remains a major question mark as any indication of increased Chinese output will quickly translate into new pressure on oil prices.
On April 24, Brent crude slipped 86 cents, or 1.1%, to $82.52 a barrel. West Texas Intermediate (WTI) crude was down 83 cents, or 1.1%, at $78.70. Both contracts fell more than 5% last week.
“The market has gone crazy. You are having less production supposedly and lower prices,” the Chairman of the Institute of Energy in South-East Europe, Costis Stambolis, told NE Global. “The reason this is happening is that although OPEC+ and Russia have announced lowering production this has not started taking hold yet. It will start taking hold from June onwards.”
IMF outlook shows economies facing high uncertainty
The International Monetary Fund on April 19 forecasted that global growth will slow from 3.4% last year to 2.8% this year. Risks to the outlook are heavily skewed to the downside, with heightened chances of a hard landing. “There is a feeling of weak growth, and this reflects on oil prices,” Stambolis said, adding that several think tanks, including the IENE, predict that in the second half of the year, especially the fourth quarter, there will be a supply shortage because demand is going to be maintained at the same level, if not higher, while supply decreases.