Economic growth concerns dampen rally in oil prices

Business Tuesday 18/October/2022 17:19 PM
By: Times News Service
Economic growth concerns dampen rally in oil prices

Muscat: After showing swift recovery since the last week of September 2022, oil prices once again trended downwards led by concerns related to the pace of global economic growth and a possibility of a recession in parts of Europe, according to a new report.

“Crude oil future prices peaked at a five-week high level of $98.63 per barrel on October 10, 2022, after seeing consistent gains that came after Opec+ announced a larger-than-expected cut to its oil production,” the Kuwait-based Kamco invest said in its October 'Oil Market Monthly Report'.
However, prices trended downwards after the US dollar reached a fresh 24-year high on expectations of higher-than-expected rate hikes in the coming months as inflation continues to remain elevated. In addition, a downward revision to the world gross domestic product (GDP) growth rate by the IMF with a warning of increased risk of a global recession also affected the trajectory of oil prices.

Meanwhile, the rising COVID-19 risk in China once again forced the country to heighten restrictions in key Chinese cities, thereby further delaying the hopes of a crude oil demand recovery in one of the world’s largest consumers of crude oil, the report added.
On the other hand, prices of oil products saw consistent growth as the December 2022 deadline for the imposition of European sanctions on Russia nears along with recent reports of several supply disruptions.

A recent Reuters report showed some of the biggest price spikes in diesel prices in Europe and the US. The price rise in Europe came as a result of oil refinery worker strikes in France while in the US refinery maintenance is affecting the supply of finished products.

Refinery data compiled by Bloomberg showed more than 0.9 million barrels per day of refinery capacity outage in the US with an additional more than 1 million barrels per day of outage in Northwestern Europe and the Mediterranean region. In addition, a recent leak in a key European oil pipeline in Poland that connects Russia to Germany halted supplies and supported prices. Another incident of malfunction at Shell’s Pernis refinery resulted in excessive flaring.

On the production side, the decision to lower output by 2 million barrels per day by the Opec+ group from November 2022 came as a surprise to the oil market as traders had braced for a much smaller cut due to the international pressure led by rising inflation rates. The cuts include Saudi Arabia and Russia curbing combined output by more than 1 million barrels per day while Iraq, UAE and Kuwait would slash production by an additional 0.5 million barrels per day combined.

The US Energy Information Administration (EIA) also lowered its forecast for oil production in its latest Short-Term Energy Outlook. The EIA now expects US production to average 12.4 million barrels per day in 2023 down from 12.6 million barrels per day in its previous forecast while global production expectation was trimmed by 0.6 million barrels per day to 100.7 million barrels per day, the Kamco Invest report said.

On the demand side, the Organisation of Petroleum Exporting Countries (Opec) lowered its demand forecast for 2022 by 460,000 barrels per day to a growth of 2.64 million barrels per day while 2023 demand was lowered by 360,000 barrels per day to a growth of 2.34 million barrels per day. The EIA also lowered its demand forecast for next year by around 0.47 million barrels per day to 101.03 million barrels per day as compared to its previous forecast of 101.50 million barrels per day.

Oil prices
Oil prices witnessed consistent declines since the start of last week following warnings of economic growth expected in the near term. The declines almost completely offset growth in oil prices that came after the Opec+ announced higher-than-expected cuts starting next month.

As a result, Brent crude oil futures were once again seen falling towards the $90 barrel mark and were trading at $91.52 per barrel on October 13, 2022. The weakness also reflected demand outlook cuts announced by the Opec, US EIA as well as IEA in their respective monthly reports.

Nevertheless, events like the disruption in the Europe oil pipeline and refining facility and an accelerated buying ahead of the winter season provided some support to crude oil prices. In its monthly report, the IEA also trimmed its forecast for refinery runs in 2023 due to higher feedstock costs that affect refinery margins at a time when economies across the globe are bracing for an economic slowdown.

Crude oil production in the US remained flat at 12 million barrels per day at the end of September 2022. Rig count data from Baker Hughes also showed the total number of oil rigs in the US hovering around the 600 mark since July 2022. The announcement by the US to release additional crude oil from its strategic reserve following the announcement of Opec+ crude output cut supported prices, but the declining inventory remained a concern for oil watchers. Weekly data showed crude oil inventory in the US declining for the second consecutive week ending on September 30, 2022, after showing growth for the previous three weeks.

Average crude oil prices witnessed mid to high-single-digit declines during September 2022. At $95.3 per barrel, the average price of the Opec crude oil basket witnessed a two-month high decline of 6.5 per cent. In addition, the average crude oil price went below the $100 barrel mark for the first time in seven months. Brent crude witnessed a steeper decline of 9.8 per cent to reach an eight-month low average price of $89.8 per barrel. The decline in Kuwait's crude grade was relatively benign at 4.9 per cent to reach an average price of $98.7 per barrel. The volatility in prices also resulted in a drop in the average forecast for crude oil prices.

The fourth quarter 2022 consensus estimate on Brent crude was trimmed by $9.1 per barrel to $91.9 per barrel whereas the estimates for the first quarter of 2023 and second quarter of 2023 were lowered by $6.0 per barrel and $3 per barrel to $90 per barrel and $92 per barrel, respectively.