Chart Of The Week   July 06 2022

Will Oil Continue Breaking Down?

Oil Falling

Over the past couple of days, oil prices joined other commodities and risk assets in signaling that recession fears are now the dominant market driver. Though the oil selloff was relatively delayed, Brent’s 9.5% drop on Tuesday followed by another 2.6% on Wednesday was violent – pushing it just under $100/bbl.

On Wednesday’s BCA Live & Unfiltered meeting, our Commodity strategists highlighted that a combination of general risk aversion and extremely thin liquidity amid elevated global policy uncertainty are responsible for oil’s sharp move lower.

However, they believe that these dynamics have caused oil prices to decouple from tight fundamentals. While slowing economic growth – as well as elevated prices – will reduce demand for oil, supply-side problems remain unresolved.

Going forward, both US shale oil producers as well as global national oil companies (specifically KSA’s ARAMCO and the UAE’s ADNOC, which are the only ones capable of raising production) will maintain capital disciple and production-management strategies. Thus, output increases from KSA and the UAE may not be sufficient to compensate for losses from other OPEC member states.

These supply side dynamics will keep oil markets relatively balanced and prevent prices from collapsing under the pressure of lower demand.