Oil Prices Slide Despite Casualty in Poland and Explosive Evidence at Nord Stream
Ukrainian soldiers in Schastia,east Ukraine, earlier this year. Photo: Tyler Hicks/New York Times
On Friday, Nov. 18th, the U.S. oil benchmark, West Texas Intermediate, slid to $80 per barrel. This is a new low from $90 per barrel at the beginning of Nov., despite crude oil storage drop, geopolitical crisis, and the same day's report indicating traces of explosives from the Nord Stream pipeline.
Several recent events have suggested a high chance of a decreasing global energy supply, especially oil. OPEC members reduced oil supply and slashed production quotas by two million barrels daily. In the meantime, the casualty in Poland and Swedish experts' uncovering explosive evidence at Nord Stream created more geopolitical caution that revolves around European energy infrastructure. With the growing Russian skepticism, European Union members announced banning the purchase of Russian diesel and other fuel products. However, oil prices still keep dropping.
Fuel product prices and their corresponding original commodity usually tend to fall over starting from Sept. due to the end of the summer driving season. Still, the current plummet is more likely to result from the upcoming global economic downturn and the unlikelihood of China's border reopening. The infection has been rising again in China lately, and President Xi of the CCP reaffirmed the strict Zero coronavirus policy he has been endorsing.
Moreover, Xi's reelection in October helped him secure the political stability to enforce such a policy. In fact, Li Keqiang, the most prominent supporter of loosening coronavirus policy and economic recovery policy, was removed from the Politburo Standing Committee, the top decision-making body in China, after the 20th National Congress of the CCP last month. Since then, shipping data shows that the number of oil tanker deliveries to China drastically decreased. The lid on China's demand for oil has significant implications for global energy prices because China, the second largest and the fastest growing economy, relies on imports for almost most of its oil.
Oil demand has also fallen in the US and EU, where the fear of recession and slow economic growth create a downturn. For the fourth straight FOMC meeting, the federal reserve announced a 75 bps rate hike. In response, the Consumer Price Index slowed to a 7.7 percent gain in the year through last month, less than the 7.9 percent prediction.
Fed Chair Jerome Powell signaled officials that there would likely be an even higher interest rate than the projected 4.5 to 4.75 percent from September. However, the chilling inflation is a double-edged sword that also announces the possible recession. Several tech companies have laid off employees to adjust the overhiring during the pandemic. And the economic decline follows consumers' decreasing spending and demand for travel and fuel products. The use of oil and petroleum products historically plummets in recession.
Recession will push down the demand and the price of petroleum products.. Photo: Alisha Jucevic/New York Times
The oil price will likely continue to drop for the foreseeable future since there is a lag for the fuel product to reflect the commodity price. Gas prices are around the same level they were before the breakout of the Russo-Ukraine War in February. However, the oil price will hit a floor after the events mentioned earlier create an even more significant impact. The 34th OPEC PLUS meeting will happen on Dec. 4, in which European countries will restrict seaborne oil imports from Russia, which make up 10 percent of the global supply. While tensions eased over the missile strike in Poland after NATO concluded the missiles came from Ukraine, the recent residue of an explosives round at Nord Stream resulted in Russian sabotage claims. The geopolitical concern is higher across Russia and Europe, bringing down the energy supply.
More importantly, the US will be the key player in putting a floor for oil prices. The Biden administration's decision to release 180 million barrels of oil from the strategic reserve will see an end. With lowered oil prices, the US can buy oil to replenish petroleum reserves for a crisis like the Russo-Ukraine War this February. We may see incentives for US oil companies to produce fuel once again. But before then, the global energy market will take a hit from investors' pessimism despite the continuing geopolitical crisis.