Crude oil prices have been on the rise for more than six months. Due to the war in Ukraine, the volatility in the market has also increased enormously, with extreme price movements especially in March. The biggest price swings now seem to have passed and the upward momentum has been leveling off in the last two weeks. Does this mean a new phase in the oil market?
The listing of Brent crude has started a cautious decline this week. On Monday, June 13, Brent oil was trading at $122,39 a barrel. That dropped to $17 a barrel today (Friday, June 119,33). If during the last trading session this week doesn't rise further, the first in five weeks is for the price to fall on a weekly basis. Oil, however, still remains firm in price. Before February 24, the price was still well below $100 a barrel and in June last year the oil price fluctuated around $75 a barrel.
Side effect of interest rate hike
The correction on the oil quotation is largely attributed to developments outside the oil market. First of all, there is the interest rate hike by the US Central Bank (Fed). The base interest rate has been raised by 0,75 percentage point to combat inflation. This is the largest rate hike in the US in 28 years. The interest rate hike initially had a significant impact on the financial markets, but also on commodities. Directly because the dollar exchange rate fell. The dollar-denominated products have become cheaper as a result. This usually causes the price of these commodities to rise. Analysts therefore call it remarkable that the oil price is falling. The real decline is even more pronounced if you include the currency difference.
The interest rate hike is intended to curb inflation, but can also put a brake on economic growth. The mainly US fuel consumption figures show that demand has so far held up well or is even growing, and inventories are relatively small. The expensive oil and fuel must eventually (be able to) be paid for. And that raises some concerns among analysts. Until now, the market has mainly been dominated by shortages on the supply side. Several analysts are now shifting their focus to the demand side and are especially curious whether if economic growth starts to show some hairline cracks, that demand will still remain so good.
Nuclear deal
US President Biden has made several requests to OPEC in recent months to increase oil production. Biden wants Opec to pump up more oil to lower the price and ultimately lower US inflation. Seen in that light, it is striking that on Thursday, June 16, the US imposed sanctions against companies from China, Iran and the United Arab Emirates for exporting petrochemical products. The Americans are therefore forced to increase pressure on Iran to revive the nuclear deal (the Joint Comprehensive Plan of Action (JCPOA)). In short, after years of negotiations, an agreement was reached in 2015 to curtail Iran's nuclear ambitions in exchange for the easing of sanctions. That accord was blown up by Trump in 2018, and since Biden's arrival at the White House, attempts have been made to revive the JCPOA. An agreement has already seemed close a few times, but has so far always failed.
The oil price is at a high level and Iran can only benefit from this to a limited extent. America is now trying to increase the pressure a bit more to get things moving. The knife then cuts both ways, or so the Americans seem to think. The Iranian economy is being boosted by the influx of oil money and the US is being helped with a lower oil price by the extra supply from Iran. Whether Iran and the current buyers of the Iranian oil will go along remains to be seen, according to experts. The sanctions are also a bit of a lightning rod for the internal problems for the White House.
The diesel market is still at a turning point. The price has increased from €170,58 per 100 liters per month to €175,87 per 100 liters. That is not yet a record, but it is an extremely high price. In March, the price has also hovered around this level for a number of days. That is before the reduction of excise duty that was implemented on 1 April.