Due to unfavorable economic expectations, the prices of the oil market are falling. The prospect of a recession in the United States and looming lockdowns in China are pulling oil prices down. However, it is far from certain that the price will remain low. At the moment, the worldwide supply is scarce. In addition, the EU will soon lose an important import partner due to the boycott of Russia.
At the beginning of November, it still looked like the oil price would rise above $100 in the short term. This trend now appears to have reversed and the oil price is moving towards $90 again. On November 11, Brent oil was at its highest point of the week at $95,99. After that the price dropped considerably. On Thursday, November 17, oil was only $91,80.
The stagnant economy in particular is dragging down the oil price. Since the summer, analysts have been warning of an impending global recession. Such a recession would be the result of the interest rate increases that various national banks are currently implementing. Because interest rate increases make it more expensive to borrow money, every increase brings a recession closer. When the economy contracts, this has direct consequences for global oil demand. In general, the oil-intensive industry slows down in bad economic times.
The economic contraction appears likely to reach at least the world's second-largest economy in the short term. According to the major American investment bank JP Morgen, a long-predicted recession on the American market is finally in sight. According to the investment bank, the American federal bank must implement several more interest rate increases before inflation reaches a desired level of around 2%. These interest rate increases will cause the US economy to shrink by about 2023% from mid-0,5.
Covid is playing tricks on the Chinese economy
It is not only the news from America that is putting pressure on the oil price. Chinese demand for oil also remains low. Covid still has a grip on the Chinese economy. The number of infections is currently rising at a record pace and unlike the rest of the world, China still applies a very strict Covid policy. For example, draconian lockdowns were imposed in several Chinese cities in 2022. During these infamous lockdowns, local authorities prohibit their population from leaving their homes. In addition, infected people in China, even if they do not show symptoms of the disease, are housed in special quarantine facilities.
The fact that China shortened the quarantine period by two days on Friday, November 11, does not reassure analysts for the time being. Because infections are rising quickly, analysts are busy speculating about new lockdowns. Because many people are not allowed to leave their homes, the oil-intensive industry is operating at half capacity during a lockdown, causing Chinese imports to lag behind. The megacity Guangzhou in particular could be locked down in the short term. Currently, more than 5.000 people in that city test positive per day. But fear of a new lockdown is also growing in Beijing and Chongqing due to rapidly rising infection rates.
Concerns about supply
It is far from certain that oil will remain cheap due to low demand. The international offering is quite limited. For example, the production of the OPEC+ countries is currently low and the relatively low oil prices do not invite them to scale up production. But the war in Ukraine also reduces supply in Europe in the short term.
From December, the European Union will stop importing Russian oil. This puts considerable pressure on the availability of oil in this part of the world. Before the war, the EU imported 2,6 million barrels of Russian oil per day. In mid-October, Europe was still importing 1,7 million barrels of oil from Russia on a daily basis. The fact that the EU has only reduced its dependence on Russia to a limited extent is partly because several refineries have been set up to process Russian oil. Oil from other countries can have very different properties, making the conversion of refineries a long and expensive process.
The availability of diesel in particular is at risk if Russian oil disappears. Most Russian oil is used for diesel production. Because a substantial part of European refineries that produce diesel are geared to Russian oil, production could become tight. Currently, about 15% of European diesel is made from Russian oil.
So far there is no immediate sign that fear has really taken hold in the diesel market. The diesel price has been falling since October 16 and this week the market has also moved mainly downwards. On Friday, November 11, the diesel price was at the highest level of the week at €145,33 per 100 liters. The diesel price then fell until Wednesday, November 16. At that time, 100 liters of diesel cost €141,97. On Thursday, November 17, the price rose slightly to €142,33.