Recently, there has been a relative calm in the global oil market, which is reflected in the fact that the daily standard deviation of the price of a barrel of WTI oil is $ 7.6 in the last two months, a decrease of about 60% compared to the previous two months.
Although the price rose by 23% between the two periods, the volatility decreased greatly. This can be attributed to the fact that the factors currently operating in the important market are, in fact, pulling in opposite directions and offsetting each other.
First, recent indications point to a slowdown in global economic activity, which may reduce the demand for black gold as a factor of production. This slowdown was not on the cards at all when the year began.
Among other things, this is a significant reduction in the forecasts of entities such as the International Monetary Fund and the World Bank for the growth of global GDP in general and the GDP of developed economies in particular.
Not without reason, we are witnessing the sharp closure imposed by China on the huge and important Shanghai province in terms of economy and trade, which is slowing down the world’s second largest economy and its energy consumption. As China adopts, quite differently from elsewhere in the world, a zero-sickness policy, the steps its authorities take are more severe and restraining, further reducing the demand for oil in its territory and as long as the morbidity data is not reset there – the situation will not change.
To this must be added the appreciation of the dollar in a world that has been going on for some time, both because the dollar is an insurer for times of geopolitical tension and fear of economic slowdown, and because of Fed signals that subsequent interest rate hikes will be frequent and sharp, raising the green note.
Since oil prices are denominated in dollars, the appreciation of the dollar works to lower the nominal prices of the liquid. Against the considerations of demand and pricing in the dollar, which push prices down, the supply side works in the opposite direction.
Naturally, these are the harsh sanctions imposed on Russia and curb the supply of crude oil and natural gas from the country. As is well known, Russia is one of the most important sources in the world for these inputs.
As in the case of China, which prefers a policy of zero morbidity, here too, the issue of sanctions, their content and scope, is a decision of governments, involving various economic, political, human and human considerations and being constantly examined.
All of these considerations may, therefore, change from time to time, which adds to market volatility. To this must be added the difficulties in Libya, which has the largest oil reserves in the African continent and among the largest in the world. Recently, oil fields in the country were forced to close due to sabotage operations.
This is a typical phenomenon for the countries of the region, which occurs from time to time, but its current timing joins the supply difficulties from Russia.
On the other hand, it should be mentioned that a number of developed countries (led by the US) have recently released some of their strategic oil reserves to the oil market, which has slightly increased the overall supply.
The International Energy Agency recently reported that in view of the recurrence of coronary heart disease and closures in China, oil demand estimates for the second quarter of 2002 and for the whole year have been reduced by 260,000 barrels per day.
According to her, the difficulties in China have also been joined by declining demand for oil in a number of developed countries.
On the supply side, the OPEC cartel and its allies, still in Russia (OPEC +), are gradually increasing their output, although not to the extent that large liquid consumers are demanding, but in view of the expected decline in demand, this will be enough to curb prices further.
Currently, oil prices are only 7% higher than their level before the Russian invasion of Ukraine, when at their peak the gap was 33% (and was achieved within just 8 days of the start of the campaign!).
This indicates, in my estimation, a halt in the rise in oil prices and a return to more economic levels, given the global economic and business environment.
I do not estimate that we will return to higher prices in the foreseeable future, let alone that the appreciation of the dollar may continue.
However, the conduct of the oil market is characterized by many factors – economic, political and military, which affect its prices in opposite directions.
The visibility of these factors today is particularly low.