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Don Yergin about oil prices falling despite tight supply, Russia’s tensions

Energy expert Dan Yergin says there are two reasons why oil prices have plummeted in the past month despite a tight market: the Fed and the Russian war in Ukraine.

Oil prices have been rising since last year after Russia launched an unprovoked war on Ukraine. But since the end of May, Brent has fallen from $ 120 per barrel to nearly $ 109 or nearly 10% less in late trade. West Texas Intermediate Futures fell more than 9% in the same period.

Yergin, vice president of S&P Global, said the US Federal Reserve is choosing to go after inflation even as the economy is in danger of recession and that it is “easing its way into oil prices.”

On Wednesday, Federal Reserve President Jerome Powell told lawmakers that the central bank was determined to reduce inflation despite acknowledging that the recession could occur. He said it would be difficult to achieve a “soft landing” to tighten policy without severe economic conditions, such as the recession.

“The other side of this … Vladimir Putin has expanded the war from the battlefield in Ukraine to the economic war in Europe, where he is trying to create a coalition that will break the alliance,” Yergin told CNBC’s “Squawk Box Asia”. Friday.

Russia has limited gas supply to Europe through the Nord Stream 1 pipeline and reduced flow to Italy. In the wake of the gas-for-rubles payment controversy, Moscow has cut gas supplies for its German contracts to Finland, Poland, Bulgaria, Denmark’s Orstedt, the Dutch company Gastrera and the fuel giant Shell.

Those actions have sparked fears of harsh winters in Europe. Area officials are now struggling to fill underground storage with natural gas supplies.

The question of China’s crude demand

Yergin said China’s demand outlook for the world’s largest oil consumer is also uncertain.

China has slowly reopened parts of the country that were recently locked down due to a spike in Covid cases. It is unclear how quickly Chinese businesses will be able to recover from those restrictions on economic activity.

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Many economists now expect slower recovery due to more widespread transformations, weak growth and less government stimulation.

The rate of recovery and resumption affects oil demand, but that uncertainty is “ [oil] As the price goes higher, ”Yergin said.

Will the supply recover?

Earlier this month, OPEC + agreed to increase production to 648,000 barrels a day, or 7% of global demand, in July, at the same rate in August. This is more than the initial plan to add 432,000 bpd per month for three months to September.

“We hope OPEC + then moves to a more liberal approach and allows some members to produce more,” Edward Gardner, a commodity economist at Capital Economics, said in a note Thursday. He was commenting on OPEC + policy after unveiling its epidemic-related supply cut in September.

That could cause Brent prices to drop to about $ 100 per barrel by the end of the year, he said.

But markets should not assume that supply will recover in accordance with that policy.

Gardner said that while production quotas have gradually eased on OPEC + members, most have failed to increase production quickly.

“Most other members are unlikely to increase production in the short term. If anything, some members, notably Angola and Nigeria, are likely to see lower output in the coming months, as years of low investment continue to hurt production,” he wrote.

– Sam Meredith and Evelyn Cheng of CNBC contributed to this report.

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