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Global Economy

Why oil is getting cheaper again

Everything gets more expensive? Especially energy? That's not quite right. Oil prices, at least, have come under massive pressure since the beginning of the month. In the middle of the week, a barrel of North Sea Brent sometimes cost less than $100. The price for a barrel (159 liters) of the US crude oil type WTI was again in double digits and was thus almost back to the pre-war level.

For comparison: after the Russian invasion of Ukraine, a barrel of Brent cost $139.13 at its peak. The price decline since the March high is almost 30 percent.

Gas crisis and fears of recession

It is primarily fears of lower demand that are depressing the price of "black gold" on the international commodity markets. Investors are speculating that the global economy could fall into recession. In such a scenario, the demand for oil would fall drastically. In Europe in particular, there is great concern about an economic downturn as a result of a gas crisis.

At the start of the week, Russia stopped gas deliveries through the Nord Stream 1 Baltic Sea pipeline due to routine maintenance work, further fueling tremors about the future of energy supply in Europe.

Fear of new lockdowns in China

In addition, there is the current corona wave in China. In the Middle Kingdom, the number of new infections had recently risen rapidly to the highest level since the end of May. The country appears to be losing its hard-fought battle against the virus with the advent of more easily transmissible omicron variants.

However, the Chinese head of state Xi Jinping only recently announced that he would stick to the strict zero-Covid strategy. This fuels fears of new lockdowns in China. "There are therefore downside risks for oil demand in China, because depending on the infection situation, renewed mobility restrictions must be expected again and again," emphasizes Commerzbank commodities expert Carsten Fritsch. As the second largest economy in the world, China is one of the largest oil consumers.

China imports record amount of Russian oil

However, fears of recession in Europe and fears of a lockdown in China are currently not the only negative factors affecting the price of oil. Market adjustment mechanisms are also in motion on the commodity markets, which ensure that Russian oil, which the West has spurned, finds its buyers again. This in turn means that these countries demand less Brent or WTI oil, which again pushes prices down.

According to data from Refinitiv, China imported a record two million barrels of crude oil per day from Russia in June. "For the second month in a row, Russia was China's most important oil supplier, ahead of Saudi Arabia," emphasizes commodity expert Fritsch.

Russian oil is becoming more expensive again

This development can also be seen in the price difference between the North Sea variety Brent and the Russian Urals oil. Urals had become massively cheaper after the beginning of the Ukraine war, as demand from the West had suddenly collapsed. "The price difference to Brent reached its greatest extent on April 19 at $37.50," emphasizes market expert Robert Rethfeld from Wellenreiter-Invest. It has since shrunk to $25.

"India and China get significantly more oil from Russia, Europe less," says Rethfeld. "With the new tanker routes and transport routes, a balance is taking place on the world markets, which reduces the difference."

Oil Embargo: Is India Tricking the West?

In fact, according to a recent report by the Finnish Research Center for Energy and Clean Air, India has recently bought more oil from Russia than ever before. "A significant portion of crude oil is re-exported as refined oil products, including to the US and Europe, an important loophole that needs to be closed," the Finnish analysts warned.

Market expert Rethfeld predicts that if new sanctions are not decided, the adjustment process between Russian oil and the oil types Brent and WTI is likely to continue. "In combination with recessionary effects, another oil price spike, i.e. a new high in the oil price, is unlikely."

Strong dollar as a stress factor

The strong dollar is acting as an additional burden on the oil market. Because commodities like oil are traded in dollars. The dollar index, which measures the value of the greenback against a basket of six currencies, was last seen at 108, a 20-year high.

ING experts believe that the dollar index could continue its climb towards 110. A strong dollar makes crude oil more expensive for investors outside the dollar area and thus dampens their demand.

Oil price with no upside potential

The bottom line is that the oil market is currently facing a whole bundle of negative factors. Against this background, rising oil prices are difficult to imagine. There is much to suggest that the price of oil has long since seen its high this year.

Market expert Rethfeld also no longer believes that the oil price has much upward potential and is forecasting a sideways movement of between 100 and 120 dollars per barrel for the US variety WTI for the coming weeks.

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