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Mon, April 22, 2024

Reasons for oil volatility

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2022 has been a rollercoaster ride for oil. The twists and turns that the year observed can be an appropriate blueprint for a thriller series. The year started with oil trading at $75.69 per barrel before following a streak of bullish elements and breaking the barrier of $100, reaching the highest price of $130.44 per barrel during the month of March. Following the bullish ride, the drivers turned bearish and slumped to $76.27 per barrel in the month of September. During the third quarter of the year, oil prices declined about 25%, ending at $79.71 per barrel, effectively 10% lower than before the start of the Russian-Ukraine conflict. Most traders opine that the market nowadays is headline-affected and the following five reasons are on top of the charts.

Federal Reserve Policy and Economic Indicators

There is a positive correlation between the demand for oil and economic activities. In simple words, the more products we manufacture, the more energy we consume and the more fuel we use transporting them via truck, ship and railway among other modes of transport. With 2023 around the corner, numerous market pundits believe a mild global recession is imminent or already underway as per some dovish believers. But the degree of this economic downturn remains in doubt, leading to greater focus on economic data releases like the weekly jobs report, monthly ISM and other related reports exuding the health of an economy. In the Great Financial Crisis of 2008, the global demand for oil fell short of the trendline growth by an average of 4 million barrels per day across a 12-month period.

Covid Policy of China

The growth of the second-largest economy has slowed sharply in 2022 as government authorities pursue a Zero-Covid policy. According to IEA data, before the pandemic hit the global economy, the Chinese oil demand increased by just 5% a year or an average of 600,000 barrels per day. However, in the second quarter of 2022, demand fell 1% year-on-year, a loss of a million barrels daily. The S&P Global Commodity Insights lowered their forecast for the next one year by over 500,000 barrels per day, an additional 187 million barrels of inventory.

Nuclear Deal of Iran

In 2022, Iran exported approximately 800,000 barrels per day of oil, down from over two million barrels per day before the sanctions were reinstated. The prospects of reviving the 2015 nuclear deal have differed vividly over the last year with high expectations in March fading by July. As per trade analysts, agreements could quickly bring on an extra 500,000 barrels per day and at least another million over the following 12 to 18 months. The discussions among delegates and deadlines for implementing agreed terms continue to be closely tracked by oil traders and analysts. In early October, Iran held out for the International Atomic Energy Agency to stop investigation into undisclosed nuclear activities.

OPEC Meetings

The meetings of OPEC and OPEC + and the commentary by corresponding ministers have a long-standing tradition of driving the prices since they can dramatically affect oil balances. During the meeting on October 5, officials implemented a headline cut of two million barrels per day from November 2022 until the end of 2023. The underperformance of OPEC+ production imply that the real supply impact will be closer to 800,000 barrels per day which amounts to over 300 million barrels, equating to a swing in oil inventories from average to a minimum.

Discussion on Strategic Petroleum Reserve

The USA released over 200 million barrels of crude oil from its Strategic Petroleum Reserve (SPR) in 2022. Some market analysts correlate the release with the decline in gasoline prices over the summer months. As the price of oil has declined over the past few months, the question remains on when and how much the US will seek to purchase. If the value increases, the focus may shift towards additional releases. The SPR policy will be crucial in the upcoming months for traders to gauge the likely trend for oil.

Conclusion

The ambiguous evolution of geopolitical and economic influences in 2022 and onward will drive oil balances which will be difficult to pin down. Apart from the above five factors, other reasons could also affect the oil balances. In this regard, the impact of European sanctions on Russian production is unknown. Most traders expect a sanction to cut 1-2 million barrels per day of supply but the output thus far has fared well against the headwinds. Public comments, meetings and geopolitical events will impact the oil trends, continue to generate headlines and provide ample opportunities for traders to manage the market risks as we step closer to 2023. READ ALSO:
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MARCH 2024

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