As recession fears continue, the impact of OPEC + production cuts is temporary International oil prices fell sharply in the shock

2023-05-09

Intern reporter Xu Chen

On May 5, international oil prices rebounded, with WTI and Brent closing at $71.34 / barrel and $75.3 / barrel respectively. Since April 12, the international oil price has fallen sharply in the shock, with the WTI oil price and the Brent oil price both falling by about 14%. This reflects that recession fears continue to dominate international oil markets and that the outlook for oil demand is grim. Opec + oil producers voluntarily cut production sharply in early April, which is difficult to change the general trend of falling international oil prices.

Market volatility

International oil prices are "inverted V" shaped trend

On March 10, two major US banks and Credit Suisse and other financial institutions broke out in crisis, causing panic in financial markets. On March 17, international crude oil prices fell significantly, hitting the lowest level since December 2021, with WTI oil prices falling to $67 and Brent oil prices falling to $73. Crude oil prices continued to recover for half a month after bottoming out, with Brent oil gradually approaching $80 a barrel and WTI oil approaching $74 a barrel at the end of March.

Crude oil prices have surged 8% since Opec + many producers announced voluntary production cuts, up 8%, with Brent above $85 a barrel and WTI approaching $81 a barrel. In the following three weeks, although the crude oil price occasionally fell, but the overall showed a rapid rise trend. As of April 12, oil jumped to its highest level since the March trough, with WTI up 22.9% to $82 a barrel and Brent up 18.7% to $86 a barrel.

However, on April 13, demand forecasts from major institutions triggered concerns about summer oil demand, combined with uncertainty about the global economy. Since then, fluctuations in crude oil prices have fallen. At the end of April, WTI oil prices fell to $77 a barrel, and Brent oil prices fell to $81.30 a barrel. In early May, oil prices remained low, with both Brent and WTI falling sharply. On May 3, WTI oil prices fell to $68.6 a barrel, and Brent oil prices fell to $72.33.

Since March 17, the international oil price has been in drastic fluctuations, and on the whole, it presents an obvious "inverted V" -shaped trend. The recent international oil price trend is low, many institutions and analysts to adjust the oil price forecast.

Multiple factors

Economic expectations predominate

Economic expectations are closely related to the outlook for oil demand, thus affecting the supply and demand relationship in the oil market. Since crude oil has a very strong financial nature, another key factor in determining oil prices is market sentiment. In addition, geopolitical conflicts, wars and other unexpected events can also affect oil prices. In the past month, the above combination of multiple factors in the international oil price, oil price trend complex changes. In this round of volatile decline, economic recession expectations as the dominant factor has affected the trend of oil prices.

Crude oil prices saw a sharp decline in mid-March, due to recession fears, investor outflows and negative expectations of oil demand. On March 10, two major American banks failed, including Silicon Valley Bank, the largest bank ever failed since the 2008 financial crisis, which is troubling the financial community. Credit Suisse (Credit Suisse), one of the world's largest banks, also had problems and was on the verge of bankruptcy, reviving fears about the global economy and sending oil prices down.

However, after crude oil prices bottomed out on March 17, the trend became a sustained rise, the dominant factor behind the industry's expected improvement of the oil market and the judgment of oil supply shortage. First Citizens The acquisition of failed Silicon Valley banks has helped dispel fears of a recession. At the same time, there sent positive signals, with bulls including Goldman Sachs, Barclays and ING all expressing optimism in the oil price report. In its report, Goldman Sachs said: " Historically, positions and prices, after a sharp drop in oil prices, have gradually recovered, especially in the long term."Rebecca Barbin (Rebecca Babin), senior energy trader at CIBC Private Wealth, and Ed Moya) both expressed similar views, which undoubtedly positively influenced expectations for the economy and the oil market. In addition, concerns over Kurdistan oil exports escalated in the continuing tug of war as Iraq ordered the closure of about 400,000 barrels of oil a day.

Opec + is trying to keep volatile oil prices high by reducing oil supplies. On April 2, its members planned to voluntarily cut production by more than 1.6 million barrels a day from May to the end of this year, but this only briefly boosted oil prices without stabilizing the market's supply and demand dynamics. The oil market has become more sensitive to geopolitical events in recent months, with keenly aware that Opec + production cuts reveal bearish sentiment and the severity of a global slowdown. At the same time, the Fed has repeatedly raised interest rates, sending an inevitable signal of economic problems, which brings negative psychological expectations. Under the influence of negative economic expectations and market sentiment, oil prices are under greater downward pressure.

On April 12, falling inflation in the US stimulated optimistic expectations for oil demand, supporting oil prices. WTI rose to $83.26 / barrel and Brent rose to $87.33 per barrel, a new high since late February.

Mr.Bob Yawger, executive director of Mizuho Energy Futures, said a major reason for the continued decline in oil prices was recession concerns. Signs of recovering demand in China, the largest importer of crude oil and refined oil products, have provided more support for oil prices, and China's re-rise may be enough to offset weak western demand, said Priyanka Sachdeva, an analyst at brokerage Phillip Nova. But the continuing decline in oil prices has made sense that oil traders feel more pessimistic about the U. S. economy than about the Chinese economy and demand."Despite China's better-than-expected GDP data, both industrial production and fixed-asset investment fell below market consensus expectations, which did not help to boost oil prices."Commented CMC Markets analyst Tina Teng.

Oil prices are unclear

Chinese demand may be the main support

Industry authorities and experts are unable to agree on the oil market and its price forecasts in a few months. From the extreme optimism of the U. S. Energy Information Administration (EIA) to the extreme pessimism of the Energy Watch Group (Energy Watch Group), 28 companies or institutions, including large oil companies, forecast oil demand growth vary dramatically. The International Energy Agency (IEA) warned in its latest monthly oil report that there would be supply shortages in the second half of the year. It forecasts the supply and demand gap to reach 2 million barrels a day by the third quarter, which will push up oil prices.

Optimism mainly comes from the steady recovery of market demand in China. The IEA said world oil demand will grow by 2 million barrels a day this year to a record 101.9 million barrels a day, mainly due to increased consumption in China after the lifting of COVID-19 restrictions. The IEA also noted that while oil demand growth in developed countries has slowed in recent months due to warmer weather and sluggish industrial activity, strong growth in China and other non-OECD countries has provided a strong offset. After the release of the latest Caixin China services PMI, many experts believe that China's services and tourism industries are booming; future crude oil prices will rebound following China's continued economic recovery. Energy consultant Wood Mackenzie sees China as the "single demand driver" in the global oil and gas market this year.

Opec + will meet in Vienna on June 4 to discuss the next step in production policy. Experts believe that if Opec + continues to cut production, crude oil prices are likely to rise again, but do not rule out a sharp fall after a small rise. In addition, the Federal Reserve raised interest rates on May 3, sending oil prices lower that day. A future rate cut will support higher oil prices.