Falling oil price: yet another false dawn in the absence of supply boost

Oil price crash - yet another false dawn


The price of crude oil has fallen in the markets on Thursday that cannot be fully attributed to the modest US inventory build announced by the API, American Petroleum Institute, on Tuesday.

Nor is the downward trend  going to be sustainable, given the high price of LNG, liquified natural gas, in the markets; the concerns in the markets in this sector imply serious supply woes in the commodity, which can easily spill over to the domain of the other commodities by its inextricable association. 

As of 10:00 GMT, the price of WTI and Brent were $96.63 and $103.89 respectively. The price of LNG was at $7.74, recording a slight fall despite the reported news about Russian gas supplies being resumed through Nord Stream-1 pipeline.

The fall of more than $3 in the early trading does not spell disaster for the markets; they have seen it before - perhaps, a week earlier too. 

Nor does it show the light at the end of the tunnel, given the uncertainties over the obvious supply constrains, which are inextricably linked to the ongoing conflict in Ukraine and the collective failure of the West to come up with a pragmatic approach.

Tightening the sanction-screw does not appear to be producing the desired results, especially when there are plenty of buyers of crude oil in the East, which are willing to risk of invoking the wrath of the US, for an absolute bargain. 

On the other hand, metaphorically speaking, even a screw, when tightened too much, loses its usability - and core purpose.

With crude oil prices at the current level, the US cannot even read the riot act to those who turn, somewhat mischievously,  to Russia for oil, knowing very well the consequences of such a step; the economies in question are still going through the recovery period after a once-in-century pandemic.

The precarious situation in Sri Lanka and Pakistan is a case in point: their respective local currencies are, literally, in free fall; the prices of oil and gas are going up at an alarming rate; in proportion, the inflation is skyrocketing; foreign exchange reserves at the Central Banks remain low and the disastrous development is unprecedented; even Bangladesh that so far managed to weather the storm, is finally feeling the pinch. 

Even India, the strongest regional economy in South Asia, finally finds itself in an undesirable position with its currency, the Indian rupee, falling to record lows in the recent weeks: the Indian finance ministry attributed it to the combination of Ukraine war, high crude oil prices and tightening global financial conditions; the Reserve Bank of India, meanwhile, admitted that its foreign exchange reserves fell to  a 15-month-low in July - $580.252 billion, losing over $8 billion.

In short, the region that has more than 24% of world's total population is under unprecedented economic strain and it goes without saying the inevitable impact on the global economy as a whole; it is not rocket science to get a grip on.

For instance, the Western companies that rely on selling goods and services to the region are going to be the first victims, something that will not reflect very well on the corresponding national economies. In this context, the threat of recession is real and analysts are keen on digesting the latest GDP figures for the Q2.

Having failed to shore up the global oil output by a hastily-arranged trip to the region, the Biden administration, as far as its energy policies are concerned, is at the end of its tether; both the UAE and Saudi Arabia, the key oil producers in the Middle East are simply saying that they do not have spare capacities to boost the supplies.

In these circumstances, the Biden administration is hell bent on imposing a price cap on Russian oil imports; Russia is warning against such a move, saying it will be a catalyst for the oil prices to reach disastrously high levels.

With the revival of the JCPOA, 2015 Iran nuclear deal, reaching a dead end, there is no way of boosting the supply in the current circumstances. 

In this context, the only factor that can potentially bring down the price of crude oil is the so-called demand destruction that still remains in the hypothetical realm, because the US crude inventory build so far has been a poor, inconsistent indicator to reflect such an eventuality. 

 

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