Despite rising crude oil prices in the near term, global demand is declining

By Joseph Thomas

Brent remains in a wide range from US $ 95 to US $ 115, and oil prices are likely to rise, mainly due to Russia’s aggression in Ukraine and related developments. The central price to which the price tends to converge is US $ 100. Although prices have been affected by Russia’s aggression in Ukraine, there are other factors that have worked. Russian oil production is reported to have fallen by about 10%, which means supply could be lower from now on. But Europe’s dependence on gas supplies from Russia is a significant number, about 17%, while the share of oil supplies is about 7% to 8%, and therefore, not too much consequence.

As we have already discussed, it can be noted that the price of crude oil has been rising since September-October last year, and therefore the contribution of the war to this price increase may be quite limited. The prospect of OPEC + expanding production and supply is not mainly due to capacity issues, and global oil demand reached pre-epidemic levels in Q4 2021. These two things have contributed to the rise in prices. In short, problems arising from potential systemic or structural deficits were the cause of inflation.

But things are slowly evolving in a more logical way. Global growth forecasts focus on the prospect of lower growth this year and perhaps next. Low growth means lower oil demand. In China and India, too, the steady growth rate is lower quarter-on-quarter and still lower. The zero-cove policy has led to the complete closure of China’s two main provinces and could have a negative impact on growth and demand. China has reportedly cut refinery activity to reduce output by about 10%, and this also reflects some easing of demand in the future. More important is the decision to release about 180 million barrels of oil over the next six months from the US Strategic Petroleum Reserve (SPR).

Recently, OPEC lowered their forecasts for global oil demand. According to them, the demand for oil will decrease by 5 lakh barrels per day this year. The International Energy Agency has set an average oil demand of 99.40 million barrels per day, down 260,000 barrels per day from the original forecast. All of these factors point to a higher price level in the immediate term, but gradually moderation in the medium term.

(Joseph Thomas MK is Head of Research at Wealth Management. Opinions are the author’s own. Please consult your financial advisor before investing.)

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