Brent Crude cracks to $95/bbl on recession worries

Brent cracks to $95bbl on recession worries
Brent cracks to $95bbl on recession worries

Global Market
by 5paisa Research Team Last Updated: 2022-07-15T16:57:45+05:30

It also looks like a very long time since we saw Brent Crude hovering around $95/bbl, but that is exactly what happened on 14th of July. Oil prices fell sharply, even briefly below the $95/bbl mark, for the first time since Russia invaded Ukraine earlier this year. Now the narrative has changed. In February and March the fear was that the war would create a shortage of oil in the global market and sanctions by the US would worsen the situation. The narrative has suddenly changed to one of being cautious about recession and slowdown.


Brent slides back to pre-invasion levels


With the Fed getting ultra-hawkish and China growing at just about 0.4% in the second quarter, the fear now is that there may not enough demand for oil. Oil prices are no longer about supply but about demand. There are strong fears of an impending global recession that is gripping the commodity markets. A slowdown is a lead indicator of destruction in oil demand and that can only get worse when the largest central bank in the world is also tightening at a frenetic pace. That is the situation that oil finds itself in today. 

If Vladimir Putin’s full-blown invasion of Ukraine caused prices to soar earlier this year, the concern today is of insufficiency of demand. At one point, Brent and WTI crude were trading above $130/bbl as the US and Europe retaliated by imposing sanctions on Russia, which is one of the world’s biggest exporters of oil, gas and a host of other commodities. Now, the converse situation is looking likely with a slowdown in China and the US Federal Reserve stifling growth with more aggressive interest rates hikes. 

Oil is rarely a commodity that moves and operates in isolation. For instance, the rally in oil was co-terminus with the spike in the price of Copper and iron. However, both these industrial metals have fallen vertically and that behaviour is showing up in crude oil too. Quite often, commodities are a solid economic indicator and that there is a lot of pain down the road for. In the US, the president is taking desperate measures like wooing Saudi Arabia at a time when Biden is rapidly losing his popularity among the American people.

For the first time, the US motorists were finding the gasoline prices at above $5/gallon just too unaffordable. This is leading motorists to abandon the use of cars and cut down on the usage of private transport. The reality is that high fuel prices are already beginning to deter US motorists from taking to the roads. Even the US Energy Department admitted that gasoline demand had slipped to its lowest level since 1996 on the back of sharply higher prices. There is not room left for debate as oil demand is under pressure.

The funny thing about oil is that there is an inflexion point after which the story changes from being supply story to a demand story. Experts believe that oil has reached that stage today. The total output of Saudi Arabia or OPEC or even the US may not really matter. What will matter is that there is a sudden contraction in demand with people also suddenly realizing that fuel is not as indispensable as food and water. That is normally the tipping point for demand to take precedence. We may just about be seeing that point now.

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