Why Oil Prices Dropped to Pre-Ukraine War Levels

7/14/2022

Energy

0 min read




Image Credit: Maureen (Flickr)

The Expected Slower Economy is Bringing Oil Prices Down

Oil is now below the level it was trading at on February 24 when Russia announced it would launch a “special military operation” within Ukraine. The price of oil dropped below $100 Bbl this week as an economic slowdown is built into the price models of commodity traders. Global growth forecasts were cut again on Wednesday (July 13) by the International Monetary Fund (IMF). This is the second growth forecast cut since April as the world’s economies face a myriad of risk factors.

Source: Koyfin

One factor impacting IMF forecasts is the extreme pace of inflation in the US. A report of a Year-over-year pace of consumer inflation released this week shows prices have risen by 9.1% from June of last year. The actual pace of inflation has steepened in the past several months. Lower fuel prices, should they hold, may serve to temper the headline CPI number over the coming months.

However, the Federal Reserve has indicated its resolve to stave off inflation by not taking half measures that prolong the problem. The acceleration of consumer prices has some economists and the futures market indicating some expect a full 100bp increase in overnight rates after the next meeting.

One of the advocates of a more aggressive Fed is Mohamed El-Erian, the Chief Economic Advisor at Allianz. El-Erian forecasted Wednesday that the Fed could raise interest rates by 100 basis points to stem historically high prices.

“The Fed now has no choice but to respond aggressively,” El-Erian wrote in a column for the Financial Times. “It is sure to increase interest rates by 0.75 percentage points later this month and could well consider a 1 percentage point rise.”

Meanwhile, those who wish to reduce Russian cash flow from petroleum sanctions may find the expected reduced demand due to a global recession a cause to rejoice. In 2021 Russia accounted for 13% of the world’s production of petroleum, the US produced 17%.

Drivers should find the price at the pumps level off some under the current conditions. If, however, the economic pace accelerates, the demand for oil may outstrip any spare production capacity they may have. This would push oil upward and could lead other prices even higher.

Take Away

Some self-correcting mechanisms in the world’s markets are creating an environment where slowing economies and forecasts for further slowing have caused commodities traders to reduce the prices they are willing to pay for oil. The lower prices and reduced demand could put a crimp on cash flow into the Russian economy.

Prices have dropped below the level they had been trading at before the war started. This could help slow the pace of inflation.

Paul Hoffman

Managing Editor, Channelchek

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