November 29, 2022

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Oil Prices

Recession fears can’t rein in the commodity boom

earlier this week, Brent crude It fell below $100 a barrel for the first time in months. So I did West Texas Middle. Copper fell to its lowest level in almost two years. It looked as if inflation had done its wrong thing. A recession was coming, and the demand for goods was about to fall. Then both oil and copper recovered. It lasted all day, although the price of copper was fluctuating with news flowing from China and its economic prospects for the rest of the year and into the medium term. The latest recovery in copper prices was, in fact, attributed By some, the Chinese government may provide additional stimulus to keep the economy running at a healthy pace.

However, it was easy to see oil’s recovery despite the notorious uncertainty in the oil markets. The reason why it was so easy to see the future was the basics. Regardless of what happens in the speculative market, the fact that the global supply of oil is scarce while demand is very much alive and still rising cannot be ignored.

The Financial Times reported it explicitly. In an article published earlier this week that addressed the price drop across commodities, according to the authors He said That “hedge funds have been instrumental in the recent price drops across commodities – selling off long or positive positions in some commodities often replaced by bearish bets.”

If the big fear in 2020 and 2021 is Covid, this year has two: Vladimir Putin in Russia and recession. Increasingly, the latter seems to outdo the former in terrifying value.

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Talk about recession is all over the news. Central banks are being targeted for criticism for tightening monetary policy too quickly, accelerating recessionary pressures. It was only a matter of time before hedge funds decided to play it safe and start selling. But, and that’s the important part, this has nothing to do with the basics. Fundamentals are the reason why oil is rising after a day of decline.

Wells Fargo has recently highlighted the extent to which there is no relationship between market price movements and actual demand and supply. According to the investment strategy division of the bank, the United States, the largest consumer of oil in the world, is already in Recession.

“There is the technical part of the recession, but then there is a significant deterioration in consumption and employment,” Samir Samana, chief global market analyst at Wells Fargo Investment Institute, told Bloomberg this week. “The technical part is the story of the first half, and the burden of unemployment and consumption is the second half,” Samana added.

Inflation has proven, according to Wells Fargo analysts, to be much faster and broader than initially expected, as a result of which consumer sentiment has worsened, and companies are changing their spending plans. But demand for oil remains as strong as it appears worldwide, although some analysts expect a decline. According to Ed Morse of Citi, for example, “Almost everyone has lowered their demand forecast for this year.” The demand was “simply not growing on an empirical basis as much as people expected,” Morse Tell Bloomberg Television.

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Demand may not be growing as expected – it would have been weird at these prices – but supply isn’t quite booming either, which may have been the driver behind Saudi Arabia’s latest price. to rise For Asian buyers to approach record levels. Sellers are not inclined to raise their prices when they expect the demand for their goods to fall.

No wonder then that Goldman Sachs, unlike Citi, Says That oil could so far reach $140 a barrel, even with all the recession fears swirling around the market. “$140 is still our primary issue, unlike stocks, which are proactive assets, commodities need to solve the incompatible supply and demand problem today,” Goldman’s Damien Corvalin told CNBC this week.

These price forecasts, whether from Citi or Goldman, do not take into account supply disruptions – the same supply disruptions that just two months ago, even a month ago, captivated markets. The disruptions are expected to come mainly from Russian oil exports, but that may now be factored into prices as there are still nearly six months left for the EU oil embargo to come into effect.

Meanwhile, alternatives to this offer for Europe are still few and far between due to the volume of Russian oil exports to the continent. This is likely to continue to have an upward impact on oil prices, regardless of economic trends. Even if the recession lowers oil demand, it will take some time for real demand to be destroyed of the kind that Citi says could push oil to $65 a barrel.

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Recession fears have a solid foundation. There is little doubt about that. However, commodity fundamentals, not just in oil and gas but in agricultural commodities and metals, have not changed simply because hedge funds suddenly started worrying about a recession. They are still tight. This sets a minimum price that will remain there as long as supply remains tight.

By Irina Slough for Oilprice.com

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