What causes oil prices to drop?
According to oilprice, at 6:15 am this morning (April 11th, Vietnam time), oil prices US WTI crude for May delivery was trading at $95.09/barrel. At the same time, oil prices Brent crude for June delivery “anchored” at 98.48 USD/barrel.
Brent and WTI oil prices fell below the $100/barrel mark in less than a week. (Illustration image – Photo: istock)
In March, the price of Brent oil futures in London at one point exceeded the threshold of 139 USD/barrel. The price of WTI oil futures in the New York market at one point exceeded 130 USD/barrel. This is the highest price threshold for the two oils since 2008.
However, in the trading session on April 11, Brent oil price closed at 98.48 USD/barrel and WTI oil price closed at 94.29 USD/barrel. From the peak price set in March, Brent oil price is now down 29% and WTI oil price is down more than 27%.
Experts say that there are three main reasons for the deep drop in oil prices. Firstly, the COVID-19 epidemic is booming in China and the Zero COVID-19 (no COVID-19) strategy forces many localities of the country to blockade.
Shanghai and many other Chinese cities are still under lockdown, raising the possibility of a slowdown in global energy demand, as the blockade means millions of people won’t drive or fly. in China – the world’s second largest oil consumer and the world’s largest crude oil importer.
The blockade measures in Shanghai could reduce China’s overall oil consumption by up to 1.3 million bpd.
“Even if the blockade orders in Shanghai are lifted, China’s Zero COVID-19 policy will likely remain a drag on demand,” according to analysts at Eurasia Group.
The second reason for the drop in oil prices is the increasing risk of recession in major economies around the world. In February, the UK economy grew only 0.1%, as construction and manufacturing activities fell simultaneously, according to the UK’s Office for National Statistics (ONS).
This growth is much lower than analysts’ expectations and is more or less worrying, because a return to normal life after the wave of COVID-19 caused by the Omicron mutation was expected to bring to the world. British economy “kick” big. Currently, the Russia-Ukraine conflict and the escalation of the cost of living are pushing the UK economy in a completely opposite direction.
Sluggish economic growth and escalating inflation pose a challenge to central banks’ ability to control prices. If central banks like the Federal Reserve raise interest rates too high or too quickly to drag inflation down, the economy is likely to fall into a recession.
Some recent forecasts suggest that the US economy may have a recession if the Fed tightens its grip. A report on April 5 by German bank Deutsche Bank warned that the FED’s fight against inflation would push the US economy into recession from the end of 2023.
“The Fed will not create a ‘soft landing.’ Instead, we believe that more aggressive monetary policy will push the economy into recession,” the Deutsche Bank report said.
The plunge in oil prices was also due to the commitment of Western countries to release 240 million barrels of oil from strategic reserves to the market in the near future. This is the largest oil reserve discharge ever seen in the world.
The administration of US President Joe Biden has committed to discharge 1 million barrels of oil a day within 6 months from May. Besides, other member countries of the International Energy Agency (IEA) also committed to discharge. another 60 million barrels of oil.
According to the IEA, Russia may be forced to cut oil production by 3 million barrels per day from this April because it cannot find buyers for oil. However, in reality, some countries such as China and India are increasingly buying cheap Russian oil.
A report on April 11 by Swiss bank UBS said that the discharge of strategic oil reserves will help ease the tightening of supply in the market in the coming months and reduce the increase in oil prices that lead to a decline in oil prices. short-term decline in demand.
However, according to some experts, the discharge of oil reserves is only a temporary solution, because OPEC +, an alliance between the Organization of the Open Oil Exporting Countries (OPEC) and a number of countries outside the bloc including Russia , has so far refused to sharply increase oil production.
OPEC + explained that the reason was because the market was not so short of oil that they had to raise output more than the current increase of 400,000 barrels / month. OPEC + is still not “obsessed” by the historic plunge in oil prices in the early days when COVID-19 became a global pandemic.
In the short term, UBS has lowered its oil price forecast, down 10 USD/barrel, but still thinks that by June, Brent oil price will recover to the threshold of 115 USD/barrel. In other words, oil prices will remain high, unless the global economy decelerates sharply.
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