- Oil prices have fallen over the past two months, with Brent and WTI crude down more than 20% since June.
- Three Rs help explain why: fears of a recession, resilient Russian manufacturing and rebounding demand.
- Analysts are divided on what’s next, with some predicting a rebound and others expecting the cascade to continue.
Oil prices have come crashing back down after soaring in the wake of Russia’s invasion of Ukraine, to the relief of politicians, companies and drivers everywhere.
WTI crude, the US benchmark oil price, has fallen 28% from its recent peak in early June, trading around $90 a barrel on Wednesday.
Brent crude, the international benchmark, is down 24% from its June peak, trading at around $95 a barrel on Wednesday. That’s down more than 30% from the March high of $140.
So why are oil prices falling? Three Rs are to blame: recession fears, Russian resilience and falling demand. However, no one is sure what will happen next.
The world economy is slowing down
Fears that the world’s major economies are headed for recession in the next year are a major factor keeping prices down. When the economy slows down, demand for energy naturally falls.
Last month, data showed that the US economy shrank for two consecutive quarters in the first half of the year. Elsewhere, the UK and the Eurozone look set to slide into a brutal recession.
“All the talk of the backlog is tied to the price of crude over the summer, forcing a substantial correction that will be welcomed by those watching nervously as they fill up their cars,” said Craig Erlam, senior market analyst at currency platform Onda.
Some analysts say the dollar’s strength has also affected global demand, cooling prices. Oil is priced in dollars and the greenback’s surge this year has made the commodity expensive for some buyers, the theory goes.
Russian production remains robust
A less-noted factor is that Russian manufacturing remains stronger than analysts had expected.
Sanctions against Russia after it invaded Ukraine in late February led many to sharply lower expectations for the country’s output, prompting traders to bid up prices.
However, the expected decline in Russian production has yet to materialize. Russia has increased its sales to India and China, and domestic demand has been strong in the summer. This means that more oil is circulating than expected.
“The market consensus is very pessimistic about Russia’s ability to re-route volumes to other buyers,” JPMorgan analysts said in a recent note.
US drivers stay home
On the demand side of the equation, appetite for oil is not as strong as many expected, even in the face of an expected slowdown in growth. For example, the US Energy Information Administration said last month that gasoline demand for the week ending July 8 was the lowest seasonally since 1996.
Meanwhile, President Joe Biden’s releases from strategic oil reserves aimed at cooling gasoline costs added to downward pressure on crude prices, analysts said.
Analysts are divided by perspective
Wall Street is undecided on whether prices are set to fall or rebound.
Analysts at Citigroup said prices could fall as low as $65 by the end of the year if a nasty recession hits the global economy. Even without a recession, Citi expects prices to fall to around $85 by year-end.
Goldman Sachs downgraded its forecasts this week, but said it still expects oil to rebound, as it thinks demand is stronger than many realize. Brent crude will rise to $110 in the third quarter and $125 in the fourth quarter, Goldman said.