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Why Oil Prices Have Been All Over the Place

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The price of crude has been on something of a roller-coaster since the start of the year. From a sudden drop in the first days of January, it climbed through the third week, only to have a hard drop a couple of days ago.

Naturally there have been news events that have driven these moves, which we’ll get to in a moment. The underlying theme, however, is general uncertainty. Without a clear direction for the global economy, traders are swinging from optimism to pessimism rather quickly. This, in turn, leads to wider swings in commodities that are barometers for economic activity. Oil, naturally, is one of the top commodities that depend on expectations of economic performance. If the economy is doing good, then more energy is needed. If the economy is doing poorly, then demand for oil will drop.

The drivers

China’s surprise GDP growth last quarter was something of a double-edged sword. On the one hand, it had a positive implication that the world’s second largest economy had gone through the covid situation without being seriously affected. On the other, it meant that less of a bounce could be expected from China, since it hadn’t gone down as much in the first place.

The rally in oil prices, therefore, was a bit fragile. It might simply have been corrected as it reached a point that was good for profit taking. But there was a series of economic data that pointed to a potential bumpy road ahead for the US. The big one was that retail sales came in well below expectations. With the US being the largest consumer of fuel in the world, it wasn’t a surprise that oil prices faltered.

It’s not just the US

The situation in Europe is complicated as well. In the last couple of weeks, Europe has had unseasonably warm weather. But a bout of cold is expected over the weekend, that could put a strain on energy. Weather perhaps is more difficult to predict than the markets; and the relative uncertainty could keep oil traders apprehensive.

On top of that, workers at French refineries went on a one-day warning strike over salary as the country faces increasing cost of living pressure. Further industrial action could substantially curtail crude demand. If the workers’ demands aren’t met, they could opt for a longer strike, which could reduce European refinery capacity, and drive up prices. The US relies on imports of refined petroleum products to meet its own demand.

The outlook smooths out later

The latest IEA report coincides with the OPEC monthly report suggesting that there will be an abundance of supply in the short term. This in the context of the global economy expected to underperform under the weight of central bank tightening.

But the IEA also warns that this oversupply situation could rebalance at any moment depending on how quickly China’s economy rebounds. Or if there is another factor that helps OECD countries achieve a soft landing and avoid a recession. After that, global crude consumption is expected to hit another record high later this year.

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