AAbout a month Following the rise of oil prices following Russia’s invasion of Ukraine, the market for one of the world’s most important commodities shows little sign of ending. On March 23, the price of Brent crude rose to 1 121 a barrel, as storm damage cut off exports from Russian pipelines. Over the last fortnight it has dropped from a peak of $ 128 to $ 98 The epidemic-related chaos of 2020 aside, OVX The index of oil market volatility over the past decade has rarely risen this month.
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From war to rising interest rates and Covid 19 reflects the interaction between geopolitical and economic forces. Even beyond the consequences of the Ukraine conflict, there are three major sources of uncertainty for the oil market. The first is the members of the Organization of Petroleum Exporting Countries (OPEC) As Western sanctions bite and Russian production is avoided. US bans Russian oil imports; Even in countries that have not taken this step, potential buyers are fighting for transactions with Russian financial intermediaries who have been cut off from the plumbing of global funding as a result of the sanctions and may fear new sanctions.
On March 16, the International Energy Agency, an official forecast, said that international markets could face a shortage of 3m barrels of oil per day from April. (The world used about 98 million barrels a day last year.) The one-time liquid global market disruption is best illustrated by the gap between the Brent benchmark and Ural oil prices. On January 31, it stood at about 60 cents per barrel. As of March 23, it was about 30.
This leaves a lot of power in the hands of two countries that are most capable of filling part of the Russian deficit: Saudi Arabia and the United Arab Emirates. So far, both have resisted the urge to substantially increase output. At a meeting in early March, OPEC And its allies (including Russia) have only confirmed existing plans to increase overall production to 400,000 barrels per day. Their next rally will be closely monitored later this month. Even small changes in the public’s tone can change the price of oil.
The second part of the uncertainty is related to the ability of American shale-oil production to meet the supply deficit. During the first fracking boom, which lasted from about 2010 to 2015, American output increased, causing oil prices to fall and weaken. OPECIts hand. But as the situation in the American economy has changed dramatically, analysts and industry insiders are skeptical that the shell could rise to the challenge.
For a start, funding conditions are less encouraging than the 2010-15 boom. The Federal Reserve is expected to raise interest rates several times this year and beyond: two-year Treasury yields just above 2%, compared to the sub-1% level that continued during most booms in the past. Another constraint on production comes from America’s hard labor market. More than 128,000 people were engaged in oil and gas extraction in February alone, less than 200,000 at the height of the fracking boom in late 2014. With a headline unemployment rate of 3.8% and employers already struggling to fill vacancies, several have found that relocating thousands of workers across the country would be pointless.
The attitude of the industry has also changed. Both American producers and their potential lenders are now much more cautious about borrowing. Banks and asset managers are bound by strict environmental standards. This is one of the reasons driving costs are high. According to a study by the Dallas Fed, the first quarter of 2022 saw the largest increase in lease-operating costs (i.e., the recurring cost of operating wells) for energy companies in at least six years. Drillers, who have struggled to make a steady profit in the past, are still much more interested in capital discipline.
The third element of oil price volatility is related to demand. China’s “Zero-Covid” strategy is being tested to the extreme. The country has recorded the highest number of cases since the epidemic began and big cities are again facing rolling lockdowns. Platts Analytics, a product-research house, suggests that the restrictions could reduce demand for oil by 650,000 barrels per day in March, roughly equivalent to Venezuelan oil production.
Even before the lockdown began, China’s economy, especially the property sector, showed signs of recession. Any signs that the slowdown in the world’s largest fuel importer is becoming broad-based will make more noise for the products.
Its conspiracy OPEC, American Shell Calculus and the Health of the Chinese Economy: Any one of these sources of uncertainty will usually suffice for a price change. Together, they form a combustible mixture. 3
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Editor’s note (March 21, 2022): This piece has been updated to reflect oil price changes.
This article is published under the heading “A volatile mix” in the Finance and Economics section of the print edition.