When Russia invaded Ukraine in the spring, energy experts predicted the price of oil could hit US$200 a barrel, a price that would push shipping and transportation costs into the stratosphere and put the global economy on your knees.
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Today, the price of oil is lower than at the start of the war, having fallen more than 30% in just two months. On Monday, news of a slowing Chinese economy and lower Chinese interest rates pushed the price down further, to below US$90 a barrel.
Gasoline prices have fallen every day for the past nine weeks, averaging less than US$4 per gallon (C$1.35 per litre) across the United States, and prices kerosene and diesel also decrease. This should ultimately result in lower prices for products as diverse as food and airline tickets.
But it would be premature to rejoice. Energy prices can skyrocket as easily as they can crash, unexpectedly and suddenly.
China, where COVID-19 lockdowns remain widespread, will eventually reopen its cities to more trade and traffic, increasing demand. Oil withdrawals from the US strategic reserve will end in November and will need to be refilled. And a single unexpected event – say, a hurricane – could cause fuel prices to skyrocket.
This kind of disaster could cause tidal waves in the US and even global economy, as energy prices are fundamental to the prices of everything that is shipped and produced, whether grain or building materials.
“Oil prices always have the ability to surprise,” says Daniel Yergin, energy historian and author of The New Map: Energy, Climate and the Clash of Nations.
Prices could fall… and rise again
Prices could ease further if Iran agrees to a new draft nuclear deal, opening a potential tap of at least an additional 1 million barrels a day of Iranian oil exports.
In addition, the prospect of a continued rise in interest rates has many investors and economists predicting a recession and reduced demand.
“I think oil prices could go down,” said Sarah Emerson, president of ESAI Energy, an analyst firm. “We have several factors coming together: China cutting crude oil imports in the third quarter, the end of strong summer demand for gasoline, concerns about an economic slowdown, and frankly, abundant supply. »
But she quickly adds, “That doesn’t mean prices won’t go up,” noting the upcoming end of the U.S. strategic reserve drawdown and the possibility of Europe substituting oil for natural gas in the event of a cold winter. .
Difficult prediction
Predicting energy prices has always been a fool’s game, as many factors come into play, including traders’ expectations, political instability in producing countries like Venezuela, Nigeria and Libya, and government decisions. investment by oil companies.
Today, these complexities are particularly difficult to assess.
A recent Citigroup report titled (When) Will Oil Bulls Start Revising Forecasts Down? raised several questions. With a global recession ‘on the horizon’, it reads, ‘what is more likely, a robust hurricane season, seeing prices soar?’ A return of Iranian barrels? Or a recession, with oil at US$60 by the end of the year or the beginning of 2023? If a barrel of oil were to fall to US$60, the average price of gasoline in the United States would likely fall by at least an additional US$1 per gallon.
But days after Citi’s projections, Goldman Sachs Commodities Research predicted a rebound in prices as fuel demand picks up. “We see growing tail risks to commodity prices inherent in the scenario of sustained growth, low unemployment and stabilizing household purchasing power,” the report concludes.
The war in Ukraine remains a major variable in the global supply outlook, as Russia normally supplies 10 of the world market’s 100 million daily barrels.
Since the invasion of Ukraine, daily Russian exports have fallen by around 580,000 barrels. European sanctions on Russian oil are expected to tighten a little more by February.
Another factor has been relatively tepid demand in the United States, which accounts for more than a third of global gasoline demand. Gasoline demand was flat to April averages, according to JP Morgan Commodities.
This trend could change with falling prices. Last week, Americans increased their gasoline consumption by 508,000 barrels per day over the previous week, according to the Department of Energy. However, consumption remained more than 300,000 barrels per day lower than a year ago.
And then there’s the move away from fossil fuels. A growing number of energy investors are skeptical about the future of oil-based transportation and say prices will fall over the long term.
“The demand for electric vehicles is growing,” said Daniel Sperling, transportation expert at the University of California, Davis. It sends a lot of signals. »
This article has summer originally published in the New York Times.