The aggressive rate hikes by central banks in the UK and the US have intensified worries about a global economic downturn and energy demand, sending oil prices crashing down. On Thursday, West Texas Intermediate (WTI) crude oil dropped by a staggering 4%, plunging below the $70 mark, and essentially erasing all gains made over the past week.
Interestingly, the international oil price has been bolstered on the supply side. The US Energy Information Administration (EIA) reported on Thursday, June 22, that US crude oil inventories had significantly decreased by 3.831 million barrels.
Simultaneously, US crude oil production fell by 200,000 barrels to 12.2 million barrels, marking the largest drop since the week of September 3, 2021. Additionally, reports suggest that starting in July, Saudi Arabia plans to cut production by 1 million barrels per day.
However, the negative sentiment induced by the aggressive rate hikes has continued to dictate market trends. Federal Reserve Chairman Jerome Powell suggested on Wednesday that interest rates may be raised twice more by 25 basis points within the year. On Thursday, the Bank of England unexpectedly hiked rates by 50 basis points, further exacerbating investor anxiety.
Andrew Lipow, president of Lipow Oil Associates in Houston, noted that despite the reduction in crude oil inventory and only a slight increase in refined oil inventory (lower than expected), the market response was not as strong as he anticipated, suggesting that the rise in interest rates weighed on the crude and refined oil markets.
Market analysts argue that the global oil market is in the "eye of a fragile storm." The Brent crude oil prices and price spreads indicate a near balance in the oil market, but this balance is precarious.
In terms of price spreads, on the spot market on June 21, the spread between July and August contracts was virtually flat, lower than the futures discount of 64 cents per barrel on April 12. The spread between August and September contracts remained at a futures discount of 34 cents per barrel, but it has dropped to half of the 70 cents seen in April; a similar trend is seen in the futures market.
When it comes to price movements, intraday price trends over the past month have been relatively moderate, with an annualized volatility of 34%, standing at the 67th percentile level of all trading days in this century, just slightly above the long-term average level of 29%.
Analysts suggest that the trends in prices and spreads reflect a diminished market concern over potential supply shortages, indicating that production and consumption will likely stay balanced for the rest of this year.
Further analysis suggests that this balance might be quite fragile. Global oil inventories are far below long-term average levels, especially in refined fuels like diesel and heating oil:
If the global economy can avoid recession and return to stable growth, low inventory levels could rapidly push up crude oil prices and spreads.
However, since the start of the year, the outlook for the economy and oil consumption has worsened, temporarily suppressing any bullish sentiments.
Persistent inflation in North America and Europe has put upward pressure on interest rates, which may lead to longer and deeper slowdowns in manufacturing and freight demand.
On the supply side, US shale oil production and output from Venezuela, Iran, and Russia have all exceeded expectations.
Consequently, it's expected that the global supply-demand balance, originally projected for the second quarter, may be postponed to the third quarter, or possibly even the fourth quarter of 2023.
