Oil prices drop below pre-invasion levels

Oil prices wiped out all the gains triggered by Russia’s invasion of Ukraine last week, after facing a steady decline since mid-June, as rising interest rates sparked fears of a global economic slowdown that could heavily impact energy demand.  Benchmark Brent crude fell almost 9 per in the first week of August, to close at $94.35 per barrel on Friday.

Brent closed at $96.63 just before Russia invaded Ukraine on 24th February.  Prices then soared to as high as $138, as markets reckoned with the fallout from the conflict.  West Texas Intermediate, the main benchmark for North America followed a similar pattern, touching a high of $123 in mid-June and closing last Friday’s session at $88.53, a drop of almost 30 per cent from peak to through in the space of just two months.

The fall in oil prices is a relief to large consumer nations, including the United States and countries in Europe, which have been urging producers to ramp up output to offset tight supplies and combat raging inflation.  Previously, a sudden rebound in demand from the darkest days of the Covid-19 pandemic coincided with supply disruptions stemming from sanctions on major producer Russia over its invasion of Ukraine.

However, a wave of bearish sentiment and fears over demand destruction have swept through financial markets in recent weeks.  OPEC+ modest production hike mid-last week, did little to arrest the slide other than the briefest of bounces.  Recessionary fears have been flagged in both the US and Europe, while China’s post-Covid recovery has proved sluggish amid on and off restrictions.

The selloff last week was, however, largely sparked by data from the US Energy Information Administration (EIA), that showed demand for fuel in the US had fallen to the pandemic levels of 2020 in the final week of July due to high prices.  Investors will now eagerly await the next data point to see if this was a mere blip in the data or a new normal.  Russia also continued to produce, refine and export more barrels than expected, while refined product cracks have tumbled sharply from the record highs of June and July. 

Oil markets have also largely shrugged off the warning from OPEC+ over severely limited availability of excess capacity, with slim volumes of additional barrels among the producer alliance - believed to be under 3 million barrel per day, seemingly already factored into the market.  Meantime, the number of oil rigs, an early indicator of future output, fell by seven last week to 598, the first weekly decline in 10 weeks, energy services firm Baker Hughes said in its closely followed report on Friday.

Supply concerns are expected to ratchet up closer to the winter, with European sanctions banning seaborne imports of Russian crude and oil products set to take effect at the start of December.  With the EU halting seaborne Russian imports, there is a key question on whether Middle Eastern producers will reroute their barrels to Europe to backfill the void.  Also important will be return of China’s demand for crude which could bounce back anytime.  These factors will be two of the most consequential matters to watch for the remainder of the year.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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