Oil prices have experienced shocks since 2020 – first came the corona virus and oil prices fell into the negative range for the first time in history, due to the cost of storing the barrels. When the situation cleared up, the world realized that although it would take time, everything would eventually return to functioning as before the corona virus, prices rose at a rapid rate and in the first quarter the price of a barrel of crude oil returned to where it was before the corona virus. The increases continued into 2022 and intensified after Russia’s invasion of Ukraine.
Similar to what happened at the beginning of the corona, oil prices reached an extreme state, this time in the form of increases and the price of a barrel of WTI oil reached over 120 dollars per barrel. As happened after the Corona, the world realized that the war will not cause an unprecedented energy crisis and prices began to fall last summer, thanks in part to the massive release of barrels of oil to the market from the US emergency stockpile.
The downward trend continued until March, when it was exacerbated by the fear of a recession that followed the collapse of SVB Bank. The meaning of a recession for oil prices is very bad – a recession is actually a significant slowdown in the economy and when the demand for products and services decreases and citizens try to save as much as possible, the demand for oil decreases as well.
In order to deal with the drop in prices, the OPEC+ organization (which includes, among others, Russia, Saudi Arabia and Iran) decided on a significant reduction in the oil output of its member countries. In the end, the reduction threshold amounts to approximately 1.7 million barrels per day, a cut that will apply This coming May and at least until the end of this year. The decision led to a jump in oil prices – from a price of 65 dollars per barrel WTI up to 80.5, as of the close of trading yesterday (an increase of 23%).
In addition to the output cut, one of the factors that can push oil prices up is the strengthening of the Chinese economy after the lifting of the Corona restrictions at the beginning of the year. China is a significant consumer of oil and a full opening of the industry and a return of the factories to production was already expected to push the prices up, which has not happened yet. The number of cars sold in the first two months of the year in China decreased by 9.4% and international flights from China are at 22% of where they were before the corona virus (as of the middle of last month). Despite the weak data, the largest oil company in China believes that the demand for oil is expected to grow in the coming year by more than 5%.
An increase in oil demand in India could also help push prices higher. According to the Ministry of Energy of India, India’s oil imports increased in February by 8.5% compared to the situation in the corresponding period.
Bank of America now predicts that oil prices could reach up to 90 dollars per barrel this year, Goldman Sachs raised the forecasts to 100 dollars per barrel and there are analysts who believe that oil can reach up to 160 dollars per barrel.
What, despite all the optimism, could ruin the celebration – a recession
It was not for nothing that oil prices plummeted after the collapse of SVB. Fear of a recession has risen and oil traders remember what happened in the last crisis. In 2008, the price of oil fell by 75% from a record of about 145 dollars per barrel in less than six months. Although the output cut has now managed to raise prices, there is no doubt that a recession in the US will overcome any cut or other by the OPEC countries, as happened in 2008. We’re not in recession yet but the slope is very slippery and the warning signs are many – this week we saw the Fed’s favorite recession indicator flashing brightly.
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