An unstable geopolitical climate and rising inflation have caused oil demand to fluctuate alarmingly since its biggest drop in March 2022. On July 5, global oil demand plummeted by about 9% over fears of another lockdown in China and an impending recession.
The International Energy Agency (IEA) warned that the worst may be yet to come. The energy crisis has taken a turn for the worse as Russia’s invasion of Ukraine jeopardized global oil demand and supply.
What affects the demand for oil?
Geopolitics, supply, and demand are the three main factors that affect oil prices. Furthermore, a fear of recession has also affected demand, with people preferring to stock up on long-lasting commodities as inflation squeezes household budgets.
Oil futures sank along with natural gas, gasoline, and equities, which often serve as demand indicators for crude. Experts believe that the global oil demand will go down as higher fuel prices force people to trim their spending. On July 5, oil prices fell below $100 per barrel for the first time since May. Industry leaders are worried that it might slip to as low as $60 per barrel by the end of the year if current economic conditions prevail. Citi analysts are fearful that prices may drop to $45 in 2023.
The Covid-19 outbreak in China has exacerbated fears as potential lockdowns will cause oil demand to take a hit. Oil industry veterans predict that a recession will significantly impact energy demand, with supplies outstripping demand.
The price of US benchmark West Texas Intermediate slid roughly 8% to trade at around $99 per barrel, while international benchmark Brent crude now trades at just over $103 per barrel. Citigroup analysts told Bloomberg that almost everyone has reduced their expectations for oil demand this year. The group has even reduced its forecast by about a third, to 2.4 to 2.5 million barrels a day.
On the other hand, the world’s top exporter of oil, Saudi Arabia, has increased its prices for August for the Asian market, amidst high demand and tight supply.
Economic Downturn and Oil
Fears of a recession have dominated the crude oil market. Experts caution that it will be a volatile few months as the world struggles to adjust demand and supply. Meanwhile, the US president is scheduled to visit Saudi Arabia as oil prices have wreaked havoc on the global economy. In March, Saudi Aramco announced that it would boost spending on oil production to meet rising energy demand.
In the US, demand for crude has plunged considerably as central banks attempt to fight off recession by raising interest rates. The rising dollar has also made oil less appealing to investors, who would rather place their bets on safer options.
Russia’s conflict with Ukraine has also resulted in the international community pummeling Moscow with sanctions EU leaders recently agreed on the sixth package of sanctions, which includes a partial ban on Russian crude. There is also a rising concern that Russia might wield energy as a weapon to defend itself as Western nations come down hard on it. Russia has already halted natural gas shipments to Denmark, Finland, Bulgaria, the Netherlands, and Poland and reduced supplies to Germany for not paying for Russian gas in rubles. This results in Germany facing an energy crisis as it prepares to store up gas for winter.
Current oil demand continues to remain weak as a somber economic outlook forces investors to be cautious and Europe grapples with an energy crisis in the making. Recently, the euro fell to a 20-year-low against the dollar.
