Rising crude oil prices: is the dreaded demand destruction in the offing?

 

Crude oil price and demand destruction in March 2022

Despite the relative rise in crude oil prices in the markets in the early hours on Wednesday, the downward trend started continuing once again as the day wears on.

As of 10:35 GMT, the prices of WTI and Brent were at $95.62 and $99.13 respectively.

The fall in prices on Tuesday, perhaps, may have stemmed from two factors: the revolving optimism over the revival of the JCPOA, 2015 Iranian nuclear deal, was back in the green realm, after Russia’s announcement that it got the written guarantee from the US about its trade dealing within the framework of the JCPOA being exempt from the sanctions; in addition, the API, American Petroleum Institute, reported that there was a significant crude build in the US during the week ending March, 15.

The EIA, US Energy Information Administration, will release its own data of the US crude oil inventories on Wednesday. Analysts eagerly await the report to see whether the data from the two agencies forms a consistent pattern in the current circumstances that breed unprecedented uncertainty in the markets.

US crude oil production 2019 - 2022 by EIA


Although the West showed its determination to keep the Russian oil away from the international markets, they find it hard to fill the gaping holes in the supply chains; the major producers, meanwhile, show reluctance to increase the output, citing various reasons ranging from contractual obligations to unrealistic logistical challenges, something that they usually blame on the under-investment in the sector.

Moreover, the major producers in the Middle East, especially the UAE and Saudi Arabia, stubbornly refuse to succumb to the American pressure, not only to boost the production, but also to isolate Russia, a fellow OPEC+ member.

The hastily-arranged visit by the British prime minister to the region, analysts believe, may be an attempt to make a bridge between the former allies at a very crucial time – especially when the Middle Eastern bigwigs refuse to lift their phones up!

The OPEC+, meanwhile, voiced its concern over the war in Ukraine and its political fallout: the OPEC+ says the developments intensify the global inflation that in turn hurts the oil demand – and consumption – in addition to, of course, much-needed investment.

Judging by the rig count, the US has ramped up its oil production. It, however, is enough the bring down the prices at the pumps, according to analysts. The US needs to import more oil in order to keep the prices low – and affordable for the ordinary Americans.

US oil rig count


Analysts in the crude oil markets have been warning against the price of crude oil going past $100 a barrel: they were in fear of demand destruction, when the price reached 13-year high; the latest API inventory data shows it could be real if the prices remain above $100.

 

 

It is not rocket science to see why that is going to be the case: when prices go through the roof, ordinary motorists just adapt their budget by consuming low and cut down on their travels.

In short, the price of crude oil at the current level is neither sustainable nor desirable by anyone, including the oil producers, because the latter have been there before and know very well what goes up comes crashing down, while causing havoc at many different levels in the sector; what happened in 2014 is a classic case in point.

Russia, having been battered by the crippling sanctions in the aftermath of the war in Ukraine, has since offered crude oil at discounted rates to what the former considers as ‘friendly’ nations; India has already shown it enthusiasm over the offer and is exploring ways to bypass the US dollar as the exchange currency for the deal.

India, the world’s third largest consumer, will certainly use its political and economic power in the region not to bend under the pressure from the West, citing its own interests; India still maintains its neutrality when it comes to the war in Ukraine and shows no signs of changing it on a whim.

Even the Western countries that warmed to the idea of sanctions against Russia, apart from Canada, are already feeling the pinch on the economic front due to rising energy prices.

If the real concerns are not addressed collectively, the alliance may see cracks at the seam much earlier than they anticipated; unlike the strong men like President Putin and President Xi Ji Ping who are in their poistions absolutely for life, most Western leaders are elected for shorter periods and the survival in even those periods stems from sheer luck rather than from broad-based political strength.

In this context, why the Western leaders run helter-skelter in seeking alternatives for the vacuum left in the energy markets due to the expulsion of Russia is fully understandable. How successful they are going to be in this endeavour, however, is something that remains to be seen in the coming weeks.

 

 

 

 

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