Yesterday, the orders data from factories and the ISM PMI index were published, which rekindled the fears on Wall Street about the Fed’s continued interest rate hikes. The data were higher than expected – total orders from factories increased by 1% compared to the expected 0.7% and the ISM PMI index stood at 56.5 compared to the expected 53.3. These data startled the market because they continue to show something that Fed Chairman Powell has been trying to suppress for about six months – The strength of the American economy. The stronger the economy (which is measured by many indicators), the more the Fed is expected to continue to be aggressive in its interest rate hikes – consumption needs to be suppressed in order to lower prices, and if the economy is strong, the Fed is probably still not strong enough.
The strength of the American economy also significantly affects oil prices – if the factories continue to produce and the demand for their products increases, that means they will need more energy to satisfy this demand and the demand for energy (oil) increases, which also increases prices. The price for a barrel of WTI oil reached a price of about 83 dollars yesterday but has since dropped sharply and is now at a price of 75.5 dollars per barrel, What pushed prices down?
Another event that affects oil prices is the setting of a ceiling price by the G7 countries (the USA, the European Union, the United Kingdom, etc.). As a sanction for the continuation of the war in Ukraine, the countries have been debating for weeks whether to set a ceiling price at which they will be willing to buy Russian oil and for how much This price will stand – at the end of the week they decided that they will set the price and it will stand at $60 per barrel. Russia already said even before the decision was made that it will not sell its oil to any country that chooses to set a ceiling price on it. The current situation of course supposed to To raise oil prices due to the fact that now the supply of oil to the G7 countries is small while the demand actually continues to rise towards the winter.
At the moment it seems that the two parties involved in the matter – Russia and the G7 countries, are the main losers, at least directly. The countries will not get the oil they need as a result of their experience in trying to educate Putin, Russia on the other hand will lose the ability to meet a lot of demand and will miss out on significant revenues for it, who will break first is hard to say but what is driving both sides right now is ego. Despite everything, there are also those who actually benefit from the whole situation.
Since the beginning of the sanctions and the worsening of relations with Europe and the West, Russia has begun to sell its oil in much larger quantities to those who are among the “enemies” of the Kremlin. Russia started selling its oil mainly to China, Turkey and India, Three countries with very high oil consumption. Now that the ceiling price has been set, those countries immediately become the main and essentially the only customers of Russia – which has been selling oil to these countries below the market price for some time. Basically, those countries will now be able to blackmail the Russians in order to lower the price of oil even more – after all, the Russians have no other option.
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Now, when you take into account the ability of these countries to buy cheap Russian oil, you get a clearer picture of the state of oil prices. Setting the price ceiling, indirectly lowers oil prices even more – China, India and Turkey will be able to buy at an even cheaper price, meaning they will need less oil from other countries than Russia, such as the Gulf countries for example, which will lower the demand for oil in these countries and the price will drop. In this view, It can be estimated that the ceiling price is actually a correct decision for the G7 countries, Even if Russia is not ready to sell oil to them – they are helping themselves by diverting the demand from the oil they want while hurting the profits of the Russians. The question is whether this plan will really be realized and whether the demand for oil this coming winter will not be so great that even the move in question will not help.
In addition to the ceiling price and industry data in the US, data regarding the commercial crude oil inventory in the US was also published. “The number of barrels of oil (held by commercial companies in the US) decreased by 12.6 million, the largest decrease since June 2019, to 419.1 million barrels – the lowest level since August and is about 8% lower than the average during this period in the last five years” noted Dr. Gil Michael Bafman, Bank Leumi’s chief economist, in his weekly oil review. Regarding the ceiling price, Bafman added that “the sanctions also include a ban on companies, providing services and insurance to ships that will transport Russian oil sold above the established ceiling price, which may make it difficult for Russia to circumvent the sanctions and supply the oil at a high price to the developing countries that do not participate in the enforcement of the sanctions.”
The OPEC+ group decided two days ago to keep its production quota unchanged, but now there are estimates that we will see further cuts in the future. “Looking ahead, to 2023, it is possible that the group will further reduce the production quotas due to the fear that the imposition of the ceiling price on Russian oil will lead to a further decrease in the global oil price. Also, there is a fear of the weakening of demand in China against the background of the increase in morbidity in the country and the “zero corona” policy that brings to the imposition of closures in large areas of China and also the weakening of global demand,” Bafman writes.
Now the “bearish” factors for oil are the strongest, but we must not forget that we are already in December and the demand for oil is expected to increase even more in the coming weeks. If indeed the countries of the OPEC organization (and OPEC+) decide to reduce their oil exports even more, when winter is also taken into account, this is not a departure from reality because we will see oil prices rise again very soon. It should be noted that despite the increase in the number of corona cases in China, some believe that the situation is close to its end, mainly thanks to the riots that are breaking out throughout the country over the continuation of the restrictions, and the opening of the country is expected to send the demand for oil up – and so will the price.
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