Status: 03/16/2022 3:11 p.m
The oil market has seen a veritable sell-off. Oil is almost as cheap again as it was before the Ukraine war. But can motorists, heating oil consumers and companies really breathe a sigh of relief?
There has been no shortage of extreme movements on the oil market lately. Just yesterday a new chapter was added to this. While motorists were still complaining about high fuel prices, the clock on the oil market had long since moved on. The price of the North Sea Brent fell at times by eight percent and fell to 97.50 dollars per barrel. The US variety WTI experienced a crash of a similar magnitude.
Oil prices give up almost all war profits
Today, oil prices initially recorded a countermovement. But the gains didn’t last; at lunchtime, the North Sea variety is already back in the minus zone at 98 dollars. The rapid sell-off on the oil market pushed prices down almost to pre-war levels. Almost all gains made since the start of the Russian invasion of Ukraine have been wiped out.
There is now almost $40 between the price currently being paid on the market for a barrel of Brent and its 14-year high, which was marked just a few days ago. As a reminder, on March 7, the Brent price had risen as high as $137.
Is Iran stepping into the breach?
But where did the sudden end of the oil price rally come from? Even though there have recently been signs of relaxation from Kyiv and Moscow, a peaceful settlement of the conflict is still a long way off. “The sanctions against Russia are likely to remain in place for a long time and make many buyers shy away from buying Russian oil,” emphasizes Carsten Fritsch, a commodity expert at Commerzbank.
The reasons for the fall in prices on the oil market are therefore less to be found in a completely new assessment of the economic consequences of the Ukraine war and more to be found elsewhere. More precisely: in Iran. The country, which recently lost its top spot to Russia on the list of the world’s most sanctioned countries, may soon return as a player in the oil market.
Renaissance of fracking
According to statements from Moscow and Washington, the sanctions against Russia should not have any impact on Russian cooperation with Iran on nuclear issues and thus on the nuclear deal. That would clear the way for US sanctions against Iran to be lifted and thus for Iranian oil exports to return, explains Commerzbank expert Fritsch.
In addition, fracking, i.e. shale oil production, is currently making a comeback in the USA. Thanks to the rise in oil prices, this form of oil production, which is as controversial as it is complex, is worthwhile again. The number of active oil wells in the United States is currently around 500. Before Covid it was over 800. The US Energy Agency (EIA) expects US shale oil production to increase by 109,000 to over 8.7 barrels in March alone per day.
China’s zero-Covid strategy as a stress factor
However, the potentially easing supply side is only one cause of the oil price decline, the changing situation on the demand side is another. Experts refer to the Chinese authorities’ strict Chinese measures against new regional corona outbreaks (zero Covid strategy). Metropolises of millions are simply cordoned off, production in factories stopped, ports closed.
What means new massive problems in the form of supply chain disruptions and lower sales opportunities for their products for the global economy and also for German companies does not bode well for the demand for oil either. But if the demand falls, the price falls too.
Has the oil price already seen its high for the year?
But is the oil price now staying at lower levels – or is the recent price drop just a short breather before prices explode again? Market expert Robert Rethfeld from Wellenreiter-Invest points to the falling growth rates in the Middle Kingdom. At the beginning of March, China’s government set the lowest growth target in three decades at “around 5.5 percent” for 2022. Rethfeld is convinced: “The high at 137 dollars is likely to be the high for the year.”
That would be good news – for companies as well as for consumers. It may take a while before the movements on the oil market reach them. But at least: the direction is right.