In oil markets, the mood has been darker. Pushed briefly to near $140 per barrel in March by Russia’s invasion of Ukraine, prices have suffered the biggest 90-day fall since the start of the Covid pandemic – and, before that, the major plunges of 2014-15 and 2008-09.
For Swiss asset manager Julius Baer – whose view that the price of benchmark Brent crude oil will average $95 this year is among the most bearish – the equation is simple: supply is outstripping demand.
“We still see demand growth, mainly in emerging markets, but we also see stagnant demand in the Western World and China”, said Norbert Rucker, Julius Baer’s head of economics.
In addition to strict Covid-19 curbs in many Chinese cities that have slowed economic activity, oil demand there has been undercut recently by temporary refinery maintenance, industry experts note.
Neil Crosby, senior oil analyst at consultancy OilX, noted that major forecasters like the IEA have downgraded their outlooks for oil demand slightly but that bearish investors were pricing in a much more drastic impact from the slowdown.
“Nobody is acutely wrong per se, but inevitably at some stage these two signals will have to converge and likely somewhere in the middle,” Crosby told Reuters.
RECESSION RISKS?
A global recession remains possible, according to the International Monetary Fund. The United States has passed through two quarters of negative growth and Chinese growth remains hobbled by COVID-19 restrictions and a property crisis.
Fuel use in the Organisation for Economic Cooperation and Development (OECD) group of prosperous nations is expected to decline in the second half of this year, the IEA said in its monthly oil report this week.
But that will be compensated somewhat by rising demand for jet fuel for air travel and a shift toward using more oil for power generation, as Russia turns off the gas taps to European nations, the IEA said.
Demand growth this year was mostly concentrated in the first half, an IEA spokesperson told Reuters. The spokesman added that its forecast for robust demand growth next year was based partly on expectations that Covid restrictions in China will be eased and the world’s second-largest economy will come bouncing back.
In another positive signal for demand, U.S. refiners including Marathon and Valero told investors last month they plan to run near full-throttle to replenish fuel inventories that have been drawing down to near-historic lows all year.
There are signs that some market participants may be seeking to buy the price dip, encouraged by developments such as the dimming prospect of a nuclear deal for Iran that would have returned large volumes of oil supply to international markets.
Investors lifted their net long positions in Brent crude oil futures in the last week of August to a nine-week high, exchange data show, before ebbing slightly.
“Recent geopolitical developments … should be bullish for energy, but prices have yet to respond,” JP Morgan said. “We advocate buying the dip”.
Key to the oil market’s outlook may be top fuel importer China, where the economy slowed in July, with factory and retail activity squeezed by Beijing’s zero-COVID policy and a property crisis.
Ed Hirs, an energy economics professor at the University of Houston, said that Chinese refinery maintenance over the summer and not economic malaise could explain reduced imports and may have temporarily helped depress global prices.
“The sell-off and the price fall really relates to China not soaking up 750,000 barrels a day of crude for the last month and a half … for an almost 0.75% drop in (global) demand, you would see the price go down by 15-20%. So that’s about right.”
Analysis-Lower Oil Prices Defy Robust Forecasts For Global Demand (ibtimes.com)