Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Oil: Possible Global Recession And Its Effect On Demand Is Key

By Ellen R. Wald, Ph.D.CommoditiesJul 07, 2022 05:01AM ET
www.investing.com/analysis/oil-possible-global-recession-and-its-effect-on-demand-key-to-price-performance-200626781
Oil: Possible Global Recession And Its Effect On Demand Is Key
By Ellen R. Wald, Ph.D.   |  Jul 07, 2022 05:01AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The WTI and Brent benchmarks fell below the $100 mark in trading on July 6 and 7 after significant declines on July 5, when Brent dropped 9% and WTI dropped 8%.

The question is whether prices will continue to drop.

1. Fears of a recession

The overriding cause of this week's decline in oil prices is global recession fears. It is possible that we might already be in a recession, and we won’t know it until certain data are released. However, the economic indicators for some of the world’s largest economies are not positive.

For example, Germany is looking at restricting manufacturing output due to a lack of natural gas. High energy prices across the world, but especially in Europe and the U.S., are causing consumers to restrict consumption. Even though travel is very strong at the moment, due to pent-up demand from the coronavirus restrictions, the fear is that consumers will be much more cautious about traveling with high prices once the summer is over.

Tuesday’s significant decline was assisted by a report from Citibank forecasting $65 per barrel oil by the end of the year if a global recession takes hold. If we do enter recession territory by the end of the summer and demand for oil drops by more than is seasonally customary, we could see an end to bull market. A recession and resulting drop in demand would be the greatest driver of lower oil prices.

2. High demand for Russian oil

When the initial sanctions on Russian oil were announced, the IEA forecast that a 3 million bpd of Russian oil would come off the market.

In April, the data showed a decline in Russian oil production as some production was shut in due to a lack of customers for Russian oil exports. However, this was quickly reversed as Russian oil found new buyers in China and India to replace the lost European customers.

It was only natural that prices would decline somewhat once the market realized that less Russian oil has come off the market than the IEA predicted.

Traders should be aware that some of the sanctions on Russian oil don’t come into effect until the end of the year, so it is possible that Russian oil exports will take another hit at the end of 2022, causing prices to rise. However, it is just as likely that by that point, Russian oil companies will have well-established relationships with their new customers, so the sanctions won’t hit significantly enough to impact the market at that point.

3. Discounts on sanctioned oil

Once Europe and the U.S. imposed sanctions on Russian oil, many refineries stopped buying oil from there, even though if the sanctions don’t take effect until the end of this year or later.

To attract new customers in other regions, Russian oil companies started offering hefty discounts on their oil. Iran and Venezuela also sell their oil at significant discounts because their oil is also under U.S. sanctions.

There is so much Russian oil available, that a price competition of sorts has emerged between Russia, Iran, and Venezuela and has pushed prices on the sanctioned oil market even lower. This can impact the global oil benchmarks as well, though we probably won’t see the full effect of this until Gulf oil producers start dropping their official selling prices to Asia. So far, this has not happened, but it could be in the cards, especially if a global recession causes demand in Europe and the U.S. to contract.

Many analysts believe that oil market fundamentals (supply and demand) indicate that the current price drops will not be sustained over the next several months and that we will see a return to triple digits.

A great deal hinges on whether the global economy enters a recession and the extent that demand declines as a result. Global oil supplies are unlikely to increase significantly enough to bring down prices at current demand levels, so traders should focus on whether demand will remain steady, grow or decline.

Oil: Possible Global Recession And Its Effect On Demand Is Key
 

Related Articles

Chris Kimble
Are Commodities Reversing Lower? By Chris Kimble - Aug 12, 2022 4

It’s fair to say that inflation has been one of the key economic buzzwords of 2022 (along with interest rates). Will the Federal Reserve’s last two big rate hikes help? Will the...

Phil Flynn
The Energy Report: The Drain Game By Phil Flynn - Aug 12, 2022 2

There is a lot of market talk about Asia buying up cheap barrels of U.S. crude because the spread between WTI and Brent prices are wide. The reason the U.S. West Texas prices are...

Oil: Possible Global Recession And Its Effect On Demand Is Key

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (7)
Ivaylo Georgiev
Ivaylo Georgiev Jul 07, 2022 9:41AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Oil +5$ today. Our economies still rely a lot on oil.
Tims Mopheme
Tims Mopheme Jul 07, 2022 9:39AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
What recession will help create accerating decline of the western world !!…
Jack Nicholson
Jack Nicholson Jul 07, 2022 9:39AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
You know we all live in the same world, right? If I ******* you'll eventually breath it in
Jack Nicholson
Jack Nicholson Jul 07, 2022 9:39AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
c'mon, I can't say ph@r÷?
The Lim
The Lim Jul 07, 2022 9:21AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Oil will go down.....coz all guy no more pocket money....
Jack Qn
Jack Qn Jul 07, 2022 9:04AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Whatever recession - oil will still go up! Movement are still there and if consumption low saudi can adjust the supply volume to keep the price up! Who in this world want lower revenues!!! So this rate hikes is a bluffing by the Biden and Powell to fool themselves and a one way ticket for Biden be out of office!
Joe Rizzuto
Joe Rizzuto Jul 07, 2022 8:41AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
disagree, the oil/energy market will respond with lower prices well in advance of more supplies hitting the market. but am increase in supply is unlikely to happen because the u.s. has an admin unwilling to work with domestic oil companies to change the supply dynamic.
Joe Rizzuto
Joe Rizzuto Jul 07, 2022 8:41AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
hello junior
Damian Wahner
Damian Wahner Jul 07, 2022 8:33AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Brandon a little into why oil prices are so high here in America, look at the permits to drill for oil. Non existent until our officials in government start giving permits to drill for oil this will be our downfall.
Brad Albright
Brad Albright Jul 07, 2022 8:33AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Another know-nothing kook. The Biden administration has issued more NEW oil and gas drilling permits than under Trump. We know return you to your previously scheduled ignorance. https://news.yahoo.com/us-oil-and-gas-permitting-has-increased-under-biden-data-show-223504727.html
Brian Hanson
Brian Hanson Jul 07, 2022 8:33AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
permits are great and all but the red tape is what stops them from producing... kook
Brian Hanson
Brian Hanson Jul 07, 2022 8:33AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
permits are great and all but the red tape is what stops them from producing... kook
Brad Albright
Brad Albright Jul 07, 2022 8:33AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Brian Hanson  So you concur that Damian Wahner's assertion that drilling permits are non existent is false. Red tape may be another discussion, but let's not waive off these know-nothing kooks who are so certain in their ignorance. It's destroying America.
Brandon Oswalt
Brandon Oswalt Jul 07, 2022 5:13AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Great piece.Why wont US increase production to increase supply?Does US want high oil prices, it seems so by their actions, why?What is the recession demand impact to oil (quantified/bpd)?
Drew Bednar
Drew Bednar Jul 07, 2022 5:13AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Biden wants higher oil prices by cutting pipelines, disallowing new drilling and legislating oil companies. Then paradoxically he calls the oil cartell and demands they produce more. Would you do so if he called you and said produce more oil therein causing a price decease where you would cut your own profits.
Brad Albright
Brad Albright Jul 07, 2022 5:13AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Drew Bednar  Another know-nothing kook. The Biden administration has issued more NEW oil and gas drilling permits than under Trump. We know return you to your previously scheduled ignorance. https://news.yahoo.com/us-oil-and-gas-permitting-has-increased-under-biden-data-show-223504727.html
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email