Global oil prices are falling, continuing their recent downward trend and falling below $100 a barrel for the first time in three weeks, as China suffers another surge of Covid-19 and returns to lockdowns that will reduce Requirement.
The drop in oil prices helped ease inflation fears in the markets. However, the respite from cheaper oil may be short-lived as the price tumble indicates the market has not fully realized the potential impact of Russia’s loss of barrels on global supply. Inflation concerns continue to dominate overall financial market activity.
The market is eagerly awaiting the two-day meeting of the US Federal Reserve starting today. The Fed should tighten its monetary policy, which should strengthen the dollar and lower oil prices.
Historically, the price of oil is inversely proportional to the price of the US dollar. The explanation of this relationship rests on two well-known premises. A barrel of oil is valued in US dollars around the world. When the US dollar is strong, you need fewer US dollars to buy a barrel of oil.
The correction in the price of oil from $130 a barrel to now near $100 a barrel in a week reflects a number of market signals.
China’s oil demand risk is real. It is experiencing its worst Covid outbreak in two years, since the initial outbreak in Wuhan. It is estimated that a severe lockdown in China could jeopardize 500,000 barrels of oil consumption per day.
China shows no signs of backing down from its controversial “zero tolerance” policy against Covid-19. This is deflationary in the short term as less money is injected into the economy and less oil is consumed, but globally it creates inflationary issues in the supply chain as manufacturing and transport get stuck.
Indeed, these economic disruptions from Covid-19 in China, the global manufacturing hub, have been responsible for many of the supply chain issues seen in the global economy over the past two years. Once again, they will reverberate with repercussions in the United States, Europe and other developed economies.
China’s woes also go beyond oil demand, and this Covid-19 outbreak is just one of many threats to China’s economy.
The housing market bubble and economic fluctuations have long signaled a real risk to GDP.
Inflationary risks persist, notably in the energy sector, recently validated by China’s plea to refineries to suspend April gasoline and oil exports to secure domestic demand and moderate prices.
Trading in the markets is becoming increasingly volatile, and reliance on algorithmic trading systems can turn a micro-signal into a cascading price impact – an event that occurs with increased frequency in the fog of war. in Ukraine and the uncertainty of the financial markets.
The US call to ban Russian oil has so far gone unanswered, with the exception of the UK, which, like America, uses little Russian fuel.
Without Europe making a formal commitment to cut its nearly 4 million barrels per day of Russian crude imports, the Russian supply risk that has pushed oil prices to $130 a barrel has been temporarily attenuated.
The disruption to Russian oil exports – crude and refined products – is now estimated at 3 million barrels per day. This represents approximately 1.6 million barrels per day of crude and 1.3 million barrels per day of products.
But predictions that total Russian supply disruptions could reach 5 million barrels a day have yet to materialize. Such a disruption would – and still could – put oil on course for $150 a barrel or higher.
Traders and refiners remain wary of Russian oil, but it continues to flow, and that trade could pick up again as buyers become more familiar with the idea of handling Russian crude or as Russia s improves to “disguise” his gross – much like Iran did. under sanctions – so that the origin of casks becomes less of an issue for buyers.
China and India, two of the world’s three largest oil importers along with the United States, continue to buy Russian crude, for example.
US inflation is also in the spotlight, and the decision expected at tomorrow’s Fed meeting to raise interest rates has slowly strengthened the US dollar and put downward pressure on oil prices.
Asia and Russia are already showing jet fuel demand distress as both have seen strong downward trends in aviation since mid-February, Russia due to sanctions but China due to the pandemic. Demand for jet fuel was the last of the petroleum products to recover to pre-pandemic levels, and the war in Ukraine and the resurgence of Covid-19 in China mean the recovery will be further delayed.
An abandonment by China of its zero-tolerance Covid-19 policy would signal less risk to oil consumption from short-term lockdowns, and further blowouts would be less of a deflationary lever on oil prices. But that doesn’t seem to be in the cards.
In short, geopolitics continues to define day-to-day market movements – with the price of oil now inversely correlated to market sentiment.
The financial markets’ consensus forecast for 2022 was for moderate but stable growth. However, global economies are currently experiencing a significant negative shock due to inflation, rising interest rates, war and resurgence of Covid.
The most expected decline in economic growth in 2022 is explained by the fact that the markets have largely taken into account the steady recovery already achieved in 2021 after the confinement. But substantial new challenges have since emerged that threaten a significant downturn.
In addition to extremely high inflation, the Russian war on Ukraine, sanctions and the resurgence of Covid cases continue to have a significant impact on the markets.
China is facing a new outbreak of Covid-19, with cases hitting a two-year high and sending millions into lockdown. Risk assets have pulled back significantly and the Nasdaq is now technically in bearish territory. Investment accounts have been hit hard, with few sectors but energy posting gains in 2022.
US inflation hit a new 40-year high of 7.9% in February – before Russia’s invasion of Ukraine and the subsequent spike in oil prices. That means things are set to get worse for Americans in the coming months, with gas prices at the pump having already hit record highs of over $4.30 a gallon.
Inflationary pressures have been building in America over the past year, but that hasn’t stopped President Biden from blaming Americans’ growing economic crisis on Russian President Vladimir Putin.
It’s impossible to ignore that Biden’s $1.9 trillion stimulus package in March 2021 has been a major factor in the rising cost of living for Americans over the past year. The coronavirus stimulus package was excessive and unnecessary — even Democrats like former Obama Treasury Secretary Lawrence Summers and Treasury official Steven Rattner have said so.
Biden also wrongly blames Corporate America for price gouging to explain higher costs. But corporate greed does not explain the rising prices of energy, food, automobiles, housing or other goods or services.
On energy, in particular, Biden’s relentless focus on climate change has promoted an anti-fossil fuel stance that doesn’t align with his newfound drive to increase domestic oil and gas production to help reduce high energy prices. Actions speak louder than words, and Biden has blocked oil and gas pipelines, tried to stop oil and gas leasing on federal lands, and aggressively pushed a clean energy agenda focused on renewable energy, although the demand for oil and gas is expected to continue growing for at least the next decade.
American producers are doing everything they can to increase production and relieve high prices, but they are private companies with responsibilities to their investors. And right now, those investors are worried about Biden’s climate agenda and its impact on the U.S. oil and gas sector. These concerns are helping to contain investment plans for new oil and gas projects, limiting supply.
Biden’s lack of understanding of the issues immediately at hand for Americans was highlighted with his promotion of the Build Back Better Act, which thankfully failed. The country does not need another $3.5 trillion in spending on Democratic projects like wind turbines and solar panels when inflation is already at its peak.
Geopolitics will continue to define day-to-day market movements, and investors are seizing on any sign of easing tensions to invest in the markets. But finding such daylight in this environment could be elusive.