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Global Economy

Is the direction of oil prices up or down?

As of July 1, we saw that as a result of compliance with this decision, OPEC oil production fell to the lowest level since May 1991. Although there are those who could not comply with the target of reducing production 100 percent on a country basis, the decision taken at the April meeting was followed in the general framework. Now, on the one hand, it is curiously expected whether this production cut will continue as of the end of July.

The increase in demand as a result of both supply cuts and the return to normalcy in the economies supported the upward movement in Brent and WTI crude oil prices.

WHAT IS OIL PRICES?

The global demand for oil had decreased by 30 percent in the period that coincided with the end of March and the beginning of April, with the effect of the closure of the economies after the coronavirus epidemic. At the end of June, we see that there has been an increase in the demand for oil with the opening of the economies, and an upward movement has been observed in Brent oil and WTI oil prices. However, the level reached with this increase is still about 10 percent below the normal levels before the pandemic. One of the important reasons for this is that although the production has been successful in reducing production, there are still significant oil reserves in stocks. When we look at the prices per barrel, Brent Petrol maintained its level of 42 dollars at the beginning of June, and as of July 1, 41.88 dollars; We see that WTI Petrol, on the other hand, maintained its $39 level, which it reached at the beginning of June, throughout the month, and stood at $39.59 as of July 1. With these prices, both types of crude oil have returned to their levels at the beginning of March.

When we look at the situation on the basis of countries, oil consumption in China, which showed the fastest recovery in many other macroeconomic indicators, has reached the levels before the coronavirus epidemic; On the European side, it is seen that there has not been a strong increase in demand in Germany, Italy and France, which has been severely affected by the epidemic, as well as in China. Especially the fact that the news about the second wave concerns has affected Europe more has an effect on this photo. On the other hand, the news coming from the USA, which rose to the first place in the number of increase in cases, is that the oil stocks are still full and the demand has not increased as in China.

SO, WHAT TO EXPECT IN OIL PRICES?

An important indicator of the increase in oil consumption, in which road transport has the largest share, is the increase in vehicle sales in European countries as of June. The global automotive industry, which was hit hard by the cessation of production, has already started to revise its year-end targets upwards with this movement.

In addition, expectations are strong that the alignment of OPEC+ countries in reducing oil supply will continue until the end of July. In fact, if this harmony continues and the stocks do not melt sufficiently despite the supply shortage, this decision may be extended for another period.

These developments will support oil prices upwards. However, as a result of this support, although the prices are in an upward trend, it is very unlikely that they will reach the levels above $ 60 at the beginning of 2020. So much so that even in 2021, reaching these levels is quite behind in the scenario analyzes made. Supply/demand balance is one of the most important factors affecting oil demand. While the demand for oil is mostly from developed economies, the oil supply is provided by OPEC countries. Therefore, while a supply-side pricing strategy is dominant at the moment, it will be possible to turn it into a demand-side one with the full control of the coronavirus epidemic.

Speaking of oil so much, it would not be possible to leave it without mentioning gold…

What oil and gold have in common is that the sharp ups and downs in the volatility levels of these two assets have large and widespread effects on economies. While gold volatility creates negative pressure on financial markets, oil volatility suppresses industrial production and can have threatening effects on consumer price indices. These two volatility factors also play an important role in whether the monetary policies of the Central Banks will be expansionary or tightening. And this, by completing the cycle, opens a path towards inflation or disinflation in the long term, and can create a reaction in the form of bringing gold’s safe-haven feature to the fore or preserving its liquid position.

Therefore, as a final word; By saying that these developments in oil will also be evident in the course of gold prices, we can add that there is a close relationship between the pricing trends of the two commodities.

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