Oil price: the great stagnation


Oil price stagnation
Oil price stagnation in 2023

Having recorded more than 4% fall on Thursday, the price of oil has slipped back into the realm of stagnation, much to the frustration of traders and of course, beleaguered producers.

As of 18:00 GMT on Friday, the prices of WTI and Brent were at $69.16 and $73.85 respectively. 

Oil price in June
Oil price on Friday, 23 June 2023

On Thursday, the Governor of the Bank of England announced a hike in interest rate: it was higher than what was expected and understandably, markets reacted while propagating the negative sentiment across the board; the doom and gloom was palpable in the thin air.

In response, the price of oil took a nose dive and remained so as the weekend approached. 

The rate hike is not just a British issue; it is almost universal: the Federal Reserve in the US, for instance,  has been in the same mode for months and yet another rate hike appears to be imminent; the state of health in the world's largest economy keeps the investors on their toes.

In the EU, meanwhile, the picture does not look good either: the interest rates have been rising throughout the bloc and in inverse proportion, the sentiment has been in decline. The European Central Bank, for instance,  raised its interest rates to their highest level in 22 years!

Interest rates in the EU


The economy in the Eurozone has slowed significantly: according the latest indications, the Purchasing Managers' Index - PMI - has fallen to 50.3 in June from 52.8 in May, reflecting the manufacturing activity on the decline, especially in the two major industrial power hubs - Germany and France; no wonder, there is perceptible, negative sentiments across the continent. 

Economic sentiment in the EU

The growth in the GDP in the EU that forms a single currency bloc of 20 countries has been in the negative territory in Quarter 4 in 2022 and the Quarter 1 in 2023. 

Since a recession is defined as two consecutive, negative growths, the bloc has been in recession for over six months. The GDP data in the second quarter in 2023 does not make pleasant reading either. The policymakers will not be able to hide the reality by adding adjectives to the word, recession, as a recession means a recession - technical or not.

It is not just the numbers that matter; consumers feel it: inflation is on the rise and more or less, out of control; rising interest rates have left homeowners in a spinning quandary, when it comes to dealing with their mortgages and getting priorities right amidst spending chaos.

Although the energy price have been falling, the manufactures do not seem to have stemmed the tide of falling output; it was the former that triggered off the crisis in the Western world - and across the world for that matter -  in the first place. 

If the falling demand is global, there is very little that the Western manufacturers can do, in order to reverse the trend. It is something that must be initiated at political level, as the current political tensions among global powers cannot be ignored as trivial; the existing tension and bad blood between the  world's top two economies is a case in point; when one tries to make the other bleed, the former needs more than a miracle not to get bruised too; it is just the plain, old phenomenon of action and reaction. The cumulative impact is there for all to see - and feel.

Against this backdrop, the investors in the oil sector pin their hopes on India and China, the world's second and third largest consumers respectively as the last resort. Although India shows a relatively robust growth, China's manufacturing activity has been a concern for the last few months. 

In addition, the oil outflows from Iran and Russia, despite the Western sanctions, are considerable; these contributions have clearly outweighed the production cuts announced by the OPEC+ in general and Saudi Arabia in particular. 

Weekly oil prices
Weekly oil price - oilfutures.co.uk

Since Iran and Russia do not share their vital data in public - for obvious reasons - analysts have been forced to use crude methods such as tanker movements to guess the real volumes.  In this context, it is a foregone conclusion that the controlling the availability of crude oil in the international markets - or lack of it - slowly slipping from the grasp of the OPEC+ as a whole; individual nations may be forced to go along their tracks, dictated by respective domestic needs rather than collective cohesive responses. 

With the demand in decline, in the absence of a danger of undersupply, the price of oil will remain in the static territory for months to come, giving rise to unsustainable spikes due to forecasts that stem from whims and fancies of hyperactive optimists. 

-- HA --

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