Factors adding to oil price volatility
Crude prices ended lower last week. The oil sell-off accelerated following the International Energy Agency’s announcement that its member countries will release an additional 60 million barrels from strategic reserves on top of the earlier US announcement of releasing 180 million barrels from the SPR. These steps eased market concerns about the near-term supply.
A stronger US dollar and unexpected rise in US crude stocks last week also pulled back oil prices. The downward revision to US demand growth also added to bearish fundamentals.
The oil market is currently faced with several issues that are adding to price volatility and uncertainty. Calls to transition away from fossil fuels are affecting investments in the industry and this underinvestment is causing a supply-demand imbalance.
Several companies in the US have voiced concerns over the accelerated increase in output but the White House appears to have the assurance from major producers that they are amenable to accelerating output.
Major US producers confirmed that the current pace of increased drilling looks highly likely to assure a minimum of 1 million barrels per day of production growth in 2022 and at least 700,000 barrels per day in 2023.
It would be important to note that sentiment is influencing markets and stimulating speculation based on concerns rather than actual disruptions. This is evident in the case of Russian oil exports. According to a Russian official, exports are down only by 400,000 barrels per day in April. This is much lower than previously exaggerated estimates influencing prices.
Despite sanctions, several countries and traders are purchasing Russian crude without real interruption. India confirmed such purchases of Russian crude and benefited from discounts.
There is also a perception that Europe is hesitant to release its reserves due to the ongoing war in Ukraine. The virus outbreak in China is also adding to market concerns.
Inflation has become a mounting worry, and the latest geopolitical crises have contributed to exacerbating the issue, given the importance of both Russia and Ukraine as major commodity exporters. The US Fed has already hiked interest rates in March and currently foresees roughly six additional rate hikes in 2022. In the US and the EU, these monetary actions could possibly reduce the economic growth beyond the desired slowdown as they also coincide with the current geopolitical issues and an underlying dynamic of de-globalization.
Additional EU sanctions on Russia coupled with traders avoiding purchases of Russian crude grades will further tighten the market for medium sour grades, particularly in Europe, in the near term.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.