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Key points to remember
- Oil prices have slowly recovered since the start of the pandemic, topping $120 in the summer of 2022.
- Prices have since fallen below $100 and OPEC plans to cut production accordingly.
- Stubbornly high inflation and fears of a recession could keep oil prices below $100.
The COVID-19 pandemic has disrupted many aspects of our lives, including a period of relatively stable oil prices in 2019. While the biggest price swings may be over, many uncertainties remain.
Fears of a recession due to rising inflation, strife in Eastern Europe and planned OPEC cuts are raising concerns about supply and demand. The current Brent price is approaching $100 and could reach that level if demand increases faster than supply.
Supply and demand trends
Global oil consumption fell sharply in 2020 due to the pandemic, driving prices below $25 a barrel. Since then, prices have slowly recovered. Oil demand and consumption increased as economies reopened, but both began to stabilize in the second half of 2021.
In the summer of 2022, global economic conditions contributed to demand concerns. China, the world’s biggest oil consumer, has taken new steps to curb a COVID-19 outbreak, leading to reduced demand.
Other issues, such as rising interest rates, are also putting pressure on demand.
World oil stocks
According to an August 2022 report by the International Energy Agency (IEA), the total oil stocks of the OECD industry stood at 2,681 million barrels. This is 292.1 million barrels below the five-year average.
The U.S. Energy Information Agency (EIA) reported global oil inventories totaling 2,744 million barrels in 2022 for OECD countries. It also forecast a slight drop in global inventories to 2,738 million barrels in 2023.
Additionally, on Sept. 30, the EIA reported that U.S. commercial crude oil inventories were down 1.4 million barrels from the previous week. He also noted that crude oil inventories in the United States stood at 429.2 million barrels, 3% below the five-year average for this time of year.
U.S. crude oil inventories have been falling since the early 2010s. With the Biden administration releasing one million barrels of oil a day, EIA data shows U.S. oil inventories are at their lowest level since the 1980s.
OPEC production cut
OPEC+ members now plan to cut oil production by two million barrels a day, which could push oil prices back to $100. The move has prompted some investors to hedge their bets in the oil market, perhaps because demand is weak and weakening.
From OPEC’s perspective, the cut is an effort to raise prices, which fell from a high of over $120 in June. In light of the decision, President Biden said the United States would seek additional tools to reduce OPEC’s control over oil prices.
Russia–Ukraine War
Russia is not officially part of OPEC, but it is part of the group known as OPEC+. While this group has agreed to cut oil production by two million barrels a day, Russia is facing its own production problems due to the war.
The country has already lost a million barrels per day of production since the start of the war. However, Russia could suffer new supply constraints since the European Union will impose an oil embargo on it from December.
There were also talks among EU countries about setting a price cap on Russian oil.
Some countries have even issued import bans on Russian oil. Additionally, damage to the Nord Stream pipeline creates more questions about supply from Russia.
EIA forecast
The EIA projects an oil price of $93/bbl in the fourth quarter of 2022 and $95/bbl in 2023. The EIA’s forecast calls for supply-demand parity midway through 2023, which it says will will last the rest of the year.
At the start of the pandemic, consumption was about five million barrels below supply. The EIA report forecasts consumption to be slightly lower than production for 2022, at 99.55 million barrels and 100.03 barrels, respectively.
However, it shows a slight reversal of this balance in 2023. The agency forecasts consumption of 101.50 million barrels and production of 101.28 million barrels for 2023.
Conclusion
The COVID-19 pandemic has seen oil consumption fall to a level well below production. This caused oil prices to fall below $25 a barrel. However, demand and supply rebounded, driving oil prices above $120 last summer.
Since then, prices have fallen again, falling below $100. While OPEC has moved to cut production by two million barrels a day, questions remain about how strong demand will be in the future.
Additionally, while the price could still hit $100, high inflation rates and fears of an impending recession could keep prices below $100 for some time. One way for investors to take advantage of these fluctuations in price, supply and demand is to invest in these markets in a diversified way. Q.ai eliminates investment assumptions. Our artificial intelligence scours the markets for the best investments for all kinds of risk tolerances and economic situations. Then we bundle them into investment kits, like the Global Trends Kit.
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