Where is the oil price headed?

When Russia invaded Ukraine in the spring, energy experts predicted oil prices could reach $200 a barrel, a price that would send shipping and transportation costs into the stratosphere and bring the global economy to its knees.

Posted at 7:00 am

Clifford Krauss
The New York Times

Today the price of oil is lower than when the war started, having fallen by more than 30% in just two months. On Monday, news of a slowing Chinese economy and lower Chinese interest rates pushed the price further below $90 a barrel.

Gasoline prices have fallen every day for the past nine weeks, averaging below $4 a gallon (C$1.35 per liter) in the United States, while kerosene and diesel prices are also falling. This should ultimately lead to lower prices for products as diverse as groceries and airline tickets.

But it would be premature to rejoice. Energy prices can soar as easily as they can plummet, unexpectedly and suddenly.

China, where COVID-19 lockdowns remain rampant, will eventually reopen its cities to more trade and traffic, boosting demand. Oil withdrawals from the US strategic reserve end in November and need to be refilled. And a single unexpected event – like a hurricane – could send fuel prices skyrocketing.

This type of catastrophe could unleash tidal waves in the US and even the global economy, since energy prices are fundamental to the prices of everything shipped and produced, whether grain or building materials.

“Oil prices always have the ability to surprise,” says Daniel Yergin, energy historian and author of The New Map: Energy, Climate and the Clash of Nations.

Prices could fall… and rise again

Prices could fall further if Iran agrees to a new draft nuclear deal, opening up a potential tap of at least 1 million barrels a day of Iran’s oil exports.

In addition, many investors and economists are predicting a recession and lower demand on the prospect of further interest rate hikes.

“I think oil prices could go down,” said Sarah Emerson, president of ESAI Energy, an analyst firm. “We have a combination of factors: China is reducing crude oil imports in the third quarter, the end of strong summer demand for gasoline, concerns about an economic slowdown and, frankly, ample supply. »

But she’s quick to add, “That doesn’t mean prices won’t go up,” citing the imminent end of US mining of strategic reserves and the possibility of Europe substituting oil for natural gas in the event of a cold winter.

Difficult prediction

Predicting energy prices has always been a piece of cake as many factors come into play including trader expectations, political instability in producing countries such as Venezuela, Nigeria and Libya, as well as government decisions, oil company investments.

These complexities are particularly difficult to assess today.

A recent Citigroup report entitled (When) will the oil bulls start revising forecasts lower? several questions raised. With a global recession ‘on the horizon’, it states: ‘What is more likely, a robust hurricane season with rising prices?’ A return of Iranian barrels? Or a recession with oil at $60 by the end of the year or early 2023? If a barrel of oil fell to $60, the average price of gasoline in the United States would likely fall by at least an additional $1 per gallon.

But days after Citi forecasts, Goldman Sachs Commodities Research predicted prices would recover as fuel demand picks up. “We see growing tail risks to commodity prices inherent in the scenario of sustained growth, low unemployment and stabilization of household purchasing power,” the report concludes.

The war in Ukraine remains an important variable in global supply prospects, with Russia typically supplying 10 of the world’s 100 million barrels a day.

Since the invasion of Ukraine, daily Russian exports have fallen by around 580,000 barrels. European sanctions against Russian oil are expected to be tightened somewhat by February.

Another factor was relatively weak demand in the United States, which accounts for more than a third of global gasoline demand. Gasoline demand was flat from April averages, according to JP Morgan Commodities.

This trend could change if prices fall. According to the Department of Energy, last week Americans increased their gas mileage by 508,000 barrels a day from the previous week. However, consumption remained more than 300,000 barrels per day lower than a year ago.

And then there’s the move away from fossil fuels. A growing number of energy investors are skeptical about the future of oil-based transportation, saying prices will fall over the long term.

“The demand for electric vehicles is growing,” says Daniel Sperling, transportation expert at the University of California, Davis. It sends many signals. »

This article has Summer originally published in New York Times.

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