Earlier this week, Brent crude fell below $ 100 a barrel for the first time in months. So did West Texas Intermediate. Copper fell to its lowest level in almost two years. It seemed that inflation had done its bad deed. A recession was approaching and demand for raw materials was about to fall. And then both oil and copper recovered. It lasted a whole day, although the price of copper has been fluctuating with the flow of news from China and the outlook for its economy for the rest of the year and the medium term. The recent rise in the price of copper was, in fact, attributed by some to the possibility that the Chinese government would provide additional stimulus to keep the economy at a healthy pace.
The rise in oil, however, was easy to see coming despite the notorious uncertainty in oil markets. And the reason it was easy to see coming was fundamental. No matter what happens in the speculative market, one cannot ignore the fact that global oil supply is tight while demand is very much alive and still rising.
The Financial Times explains this clearly. In an article earlier this week addressing falling commodity prices, the authors said that “hedge funds have been instrumental in recent commodity price declines: selling long or positive positions in certain goods and often replacing them with bearings.
If the big scare of 2020 and 2021 was the Covid, this year it has two: Vladimir Putin of Russia and the recession. And it increasingly seems that the second is outpacing the first in terms of fear value.
Talking about recession is in all the news. Central banks are being criticized for tightening monetary policy too quickly, accelerating recessive pressure. It was only a matter of time before hedge funds decided to play it safe and start selling. But, and this is the important part, this has nothing to do with the basics. The basics are why the oil went up a day after the dive.
Wells Fargo recently highlighted the extent to which market price movements have nothing to do with actual demand and supply. According to the bank’s investment strategy division, the United States, the world’s largest consumer of oil, is already in recession.
“There’s the technical part of the recession, but then there’s the significant deterioration in consumption and employment,” Well Fargo Investment Institute global senior market strategist Sameer Samana told Bloomberg. “The technical part is a story of the first half and the weight of unemployment and consumption is the second half,” Samana added.
Inflation, according to Wells Fargo analysts, has proven to be much faster and broader than initially expected, as a result, consumer sentiment has worsened and companies are changing their spending plans. But demand for oil is still robust, as it appears to be around the world, although some analysts predict a decline. According to Citi’s Ed Morse, for example, “almost everyone has lowered their demand expectations for the year.” Demand “simply didn’t grow on an empirical basis as far as people had expected,” Morse told Bloomberg TV.
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Demand may not grow as expected, it would have been a marvel with these prices, but supply is not booming either, which probably prompted Saudi Arabia’s latest price increase for Asian buyers to near-zero levels. record. Sellers do not tend to raise their prices when they expect demand for their products to decline.
No wonder, then, that Goldman Sachs, unlike Citi, says oil could still reach $ 140 a barrel, even with all the fears of recession swirling in the market. “$ 140 is still our base case because, unlike capital, which is anticipated assets, commodities have to solve today’s mismatched supply and demand,” Goldman’s Damien Courvalin told CNBC this week.
These price projections, from both Citi and Goldman, do not take into account supply disruptions, the same supply disruptions that just a couple of months ago, even a month ago, kept markets captive. The disruptions are expected to come mainly from Russian oil exports, but this could have been included in the prices as there are still about six months to go before the European Union oil embargo enters into force.
Meanwhile, alternatives to this supply for Europe remain few and far between just the size of Russian oil exports to the continent. This is likely to continue to have a bullish effect on oil prices, whatever the economic trends. Even if a recession dampens oil demand, it would take a long time for a destruction of real demand of the kind Citi says could bring oil to $ 65 a barrel.
Fears of recession have solid foundations. There is little doubt about it. However, the fundamentals of commodities, not only in oil and gas, but also in agricultural commodities and metals, have not changed just because hedge funds have suddenly begun to worry about a recession. They are still tight. And that is to put a floor below the prices that will be maintained as long as supply remains tight.
By Irina Slav for Oilprice.com
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