{"id":5296,"date":"2023-05-09T13:04:08","date_gmt":"2023-05-09T13:04:08","guid":{"rendered":"http:\/\/roydadnaft.ir\/English\/?p=5296"},"modified":"2023-05-09T13:08:00","modified_gmt":"2023-05-09T13:08:00","slug":"how-much-lower-could-oil-prices-fall","status":"publish","type":"post","link":"https:\/\/roydadnaft.ir\/English\/5296\/","title":{"rendered":"How Much Lower Could Oil Prices Fall?"},"content":{"rendered":"
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But there are plenty of bullish factors on the horizon, including falling U.S. inventories, growing Chinese demand, and slowing U.S. production growth.<\/p>\n\n\n\n

On Friday, April 7th,\u00a0Brent crude\u00a0closed at over $85 per barrel. That was a few days after OPEC+ had announced it would reduce its production by an additional 1.16 million barrels daily.<\/p>\n\n\n\n

Fast forward a month, and Brent is almost $10 cheaper. Despite the promised supply cut, despite a production suspension in Kurdistan, and despite China\u2019s demand growth, prices have fallen. And they may have further to fall. For a while, at least.<\/p>\n\n\n\n

The big reason for the price drop we witnessed over the past four weeks was economic sentiment, especially economic sentiment in the United States. Analysts loyal to the federal government are beginning to run out of euphemisms for \u201crecession.\u201d The media are getting bolder with their use of the word. No wonder oil prices are down.<\/p>\n\n\n\n

There are plenty of causes for concern. Diesel\u00a0demand is down\u00a0after months of worry that the U.S. is facing a diesel shortage because demand is exceeding supply. Well, that\u2019s one thing people need not worry about anymore. Because diesel demand is down by a lot, and that spells bigger trouble: call it a slowdown, call it a correction, but what it comes down to is what one analyst called a recession.<\/p>\n\n\n\n

\u201cIf you were looking at it in the closet, and not knowing what the wider economy was doing, you would say we\u2019re seeing some sort of an industrial recession,\u201d Tom Kloza from the Oil Price Information Service told the FT in comments on the diesel demand situation.<\/p>\n\n\n\n

Inflation, meanwhile, is\u00a0in decline\u00a0but still a lot higher than the Fed\u2019s comfort level at 5% for April, prompting yet another rate hike last week that did nothing for oil bulls. That was because of the traditionally inverse relationship between interest rates and oil demand as the former boost the dollar, making oil more expensive in absolute terms.<\/p>\n\n\n\n

At the same time, the manufacturing sector has been shrinking for six consecutive months, according to the Institute for Supply Management. It\u00a0shrank\u00a0yet again in April, although S&P Global\u00a0estimated\u00a0an expansion in the sector for last month. It begins to become clear why it is so hard to call a recession in the U.S. for now.<\/p>\n\n\n\n

Based on the latest oil price trends, there is definitely a recession, whatever the actual data says. The good thing is that this recession seems to be, at least partly, in the minds of oil traders rather than in the actual U.S. economy, where the service sector is growing despite manufacturing\u2019s shrinking. Not all is lost until another<\/a> bank collapses with a bang.<\/p>\n\n\n\n

The banking sector tremors of recent weeks have also had a lot to do with oil prices: fears of a banking meltdown have rippled into fears of a broader meltdown, and that has translated into a fear of oil demand destruction and, consequently, a selloff. But here\u2019s the thing. The supply situation may be about to change.<\/p>\n\n\n\n

China\u2019s oil\u00a0demand<\/a>\u00a0topped 15 million barrels daily in March, breaking a record. U.S. crude oil inventories are now\u00a0below<\/a>\u00a0the five-year average for this time of the year after a long streak of weekly declines. And, according to Reuters\u2019\u00a0John Kemp<\/a> and historical patterns, U.S. oil and gas production growth may slow down significantly over the next months.<\/p>\n\n\n\n

In a column earlier this month, Kemp noted the several months\u2019 lag between price movements and drilling activity in the U.S., which means that it takes several months for drilling to expand in any noticeable way after a sustained rally in prices. By the same token, Kemp noted, it takes several months between a sustained price decline and the consequent decline in drilling activity.<\/p>\n\n\n\n

The thing is that U.S. production was already in decline in February, according to the latest official data. The total was nearly 1.2 million bpd higher than the average for February 2022, but it was also more than 80,000 bpd lower than the average for January 2023.<\/p>\n\n\n\n

That\u2019s not a whole lot when you\u2019ve got a total of 12.5 million barrels<\/a> daily, but it is a very different development from what the Energy Information Administration had predicted for February: another output rise to a record high. The EIA is now predicting<\/a> that the record high will be hit in March.<\/p>\n\n\n\n

If the EIA guesses right, prices could go further down, especially if demand for fuels remains subdued now that driving season is beginning. If it guesses wrong, however, oil will likely gather steam again unless another flare-up in recession worry occurs, of course.<\/p>\n\n\n\n

\u201cThe selloff was far greater than what market balances are showing \u2014 namely lower inventories with the prospect of inventory draws as the northern hemisphere\u2019s summer unfolds,\u201d Citi\u2019s commodity chief Edward Morse said, as quoted<\/a> by Bloomberg, earlier this month.<\/p>\n\n\n\n

In other words, price movements in oil are not in sync with oil\u2019s fundamentals, and a correction may be only a matter of time. However, as clearly shown by the price decline from the past month, expectations about fundamentals are at least as important, if not more important, than the fundamentals themselves. All it could take is one more bank domino piece falling.<\/p>\n

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