Oil prices have come down massively, but celebrations may be premature
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Crude oil prices have slipped in the past two weeks as concerns about a recession – judged a strong possibility by some commentators – continue to grow.
The benchmark Brent crude is currently trading at US$109.84 ($159.11) per barrel, down from a peak of US$123.58/bbl just a little more than two weeks ago thanks to a steep plunge on Wednesday.
It follows Deutsche Bank chief executive officer Christian Sewing telling Bloomberg there was a 50% chance of a global recession while Citi head of capital markets for the Americas Kristin Bitterly was a little more optimistic with her estimate of a 40% chance going into 2023.
Locally, Reserve Bank governor Philip Lowe is cautiously optimistic, noting that the central bank did not think Australia would go into recession due to strong fundamentals, though it will be some years before inflation comes back under control.
Expect to see central banks across the globe tighten monetary policy – including increasing rates, sorry mortgage owners – in a bid to rein in inflation.
So just what would a global recession mean for oil?
The primary impact would be a likely lowering consumer demand for oil, giving supply a chance to catch up.
Already, US Federal Reserve chief Jerome Powell has flagged that US diesel demand could drop by 200,000 to 600,000 barrels per day over the next year as the economy slows.
This will in turn lower oil prices, which have been one of the key reasons for the strong increase in inflation this year.
However, there are several factors that may see prices rise again.
Germany has triggered Phase 2 of its gas emergency plan on fears that Russia might completely suspend gas supply as pipeline operator Gazprom prepares for regular maintenance of the key Nord Stream 1 pipeline.
While supplies are already constrained, a complete suspension could drive up demand for oil though Germany has been urging its citizens to reduce energy consumption for now.
Oil prices could also climb if Russia makes the – admittedly somewhat unlikely – move to suspend all its oil and gas exports to Europe.
Any price increases that will come from such a move are likely to be short-lived as it will hasten the slide towards a global recession and the almost certain reduction in oil demand that will bring about.
US President Joe Biden’s plea for Congress to implement a three-month tax holiday on gas (petrol) prices isn’t likely to help things either.
While the move is aimed at providing relief to consumers, it could also boost demand for oil.