The oil price, like most commodities, took a big hit this week. Less favorable economic prospects or even a recession are cited as the cause. Until now, the analysts have mainly looked at the supply side of the market for price formation. There are increasing indications that demand development will become at least as important in the near future.
The oil market tumbled this week. On Monday, July 4, Brent crude oil prices started the week strongly with a closing price of $113,83 per barrel, more than $2 above the price before the weekend. Due to negative economic expectations, the price jumped sharply downwards. On Wednesday, July 6, the price closed below $100 per barrel for the first time in two months at $99,64 per barrel. At the time of writing, the price of Brent oil has risen again to more than $106 per barrel. That is still a loss of 6% this week.
The drop in oil prices fits into a broader trend in commodities and stock markets this week. Tighter monetary policy (raising interest rates) in a number of leading economies, led by the FED in the US, could negatively impact economic growth. During a recession, demand for goods and raw materials falls. With the selling wave at the beginning of this week, traders and speculators took an advance on this. Whether that sentiment is justified is subject to debate.
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There are roughly two trends in the oil market. The banks JP Morgan and Citigroup released opposing views last week, both representing one trend in the market. The JP Morgan analysts mainly looked at the supply side and used calculation models to determine what would happen if Russia were to tinker with its production capacity. In the most extreme scenario, oil prices could rise to $380 per barrel, according to JP Morgan. That would happen if Russia were to completely turn off the tap in response to a price cap on Russian oil proposed by the West. With a slightly less drastic intervention, pumping 3 million barrels less per day, the price will still rise to a record $190 per barrel, according to the bank. An alternative scenario that the analysts have looked at is the possibility of Russia supplying oil to China and India outside Western sanctions. That seems tempting to the Russians, but would also mean that Russia can no longer influence the benchmark prices of Brent and WTI oil on the world market.
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Citigroup represented the other trend among oil market analysts last week. This focuses specifically on the demand side. Crude oil has become approximately 50% more expensive since the war in Ukraine. This is partly due to uncertainty and partly due to sanctions, logistical problems, and so on. High energy prices are one of the drivers of inflation and thus indirectly put a brake on economic growth. If this translates into a recession, an oil price of $65 per barrel by the end of this year is quite possible according to Citigroup analysts. The price could drop even further to $45 per barrel a year later, although that chance is estimated at 10%. If the economic contraction remains limited and a recession does not occur, the bank will still take a lower oil price into account. According to the bank's analysts, Brent crude oil will then reach $85 per barrel by the end of the year.
Of all the commotion on the crude oil market, not much is noticeable on the diesel market. Although the price of diesel showed a decline, we are still far from reaching April levels, as is the case with crude oil. On Tuesday, July 5, the diesel price peaked at €164,23 per 100 liters. That dropped to €7 on Thursday, July 153,53, the lowest price since the end of May. The price has now risen to €159,66 per 100 liters.