The price of crude oil has been falling for the last couple of weeks. It’s likely that this trend will continue. Prices have not been this low since the end of 2021. However, there are some factors that might help drive prices back up in the short term.
First and foremost, there is a lot of uncertainty in the markets at the moment. For example, Russian and Ukrainian tensions are weighing on global growth. In addition, Russia has announced that it is banning sales of its oil to some countries. While the decision is not yet final, it could have a serious impact on prices.
Another factor to consider is the size of the hole in the market. If more countries embargo Russia’s exports, it would create a 4.3 million barrels per day hole in the market. This gap cannot be filled quickly with other supply sources. One can only assume that some sort of cap will be enacted.
There is no doubt that this week’s market action is driven by supply fears. Several OPEC and non-OPEC producers have decided to cut production, leaving the markets vulnerable. In fact, the OPEC+ coalition announced the largest output cut in more than a decade.
Other factors weighing on the market include the reopening of China’s economy, which is set to bolster consumer spending this month. Interestingly, this was not enough to halt the US Dollar’s slide. Although it’s been a rough week, it has not been quite as ugly as it sounds. Some of the other major currencies are doing well, especially the Canadian Dollar. On the other hand, the Euro is getting weaker on a relative basis.
Aside from the usual suspects, there is also a new player in the race. The SPDR S&P Oil & Gas Exploration & Production ETF has a nearly 46% crude oil production ratio. That means it should benefit if oil prices rise.
Despite the hiccups, the energy industry has shown resilience. In fact, there were two signs that this might be the case: oil inventories at Cushing in Oklahoma declined to their lowest level in more than two years, and diesel and gasoline prices hit record highs.
As for the oil-market trinity of inventory, demand, and price, there are some clear winners. Unlike the oil price, inventories aren’t moving in lockstep, meaning that the real story isn’t quite as positive. Fuel stocks in the US are growing, while refined product inventories are decreasing, largely due to surging global demand for gas and diesel.
Clearly, the market is still in the early innings, and the OPEC+ coalition may be forced to make a major output cut if supply catches up with demand. However, even if this does happen, it isn’t a given that prices will continue to fall. Traders are looking for an indication of how much higher prices will get before this cyclical downturn comes to an end.
Those interested in speculating about the future of the world’s most important commodity will find a variety of useful articles, reviews, and news stories in Bloomberg’s daily energy and commodities newsletter.