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Oil prices are falling despite a tight supply

by Carl Steward
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OilOil prices are falling despite a tight supply

According to energy analyst Dan Yergin, there are two reasons why oil prices have plummeted in the last month despite a tight market: the Fed and Russia’s war in Ukraine. Since last year, oil prices had risen, reaching all-time highs when Russia launched an unjustified war on Ukraine. However, since the end of May, Brent has declined from over $120 per barrel to roughly $109, or almost 10% lower. West Texas Intermediate futures have fallen more than 9% in the same time frame.

Russia has cut to Italy and limited gas supply to Europe via the Nord Stream 1 pipeline. Over a gas-for-ruble payment dispute, Moscow has suspended gas supplies to Finland, Poland, Bulgaria, Denmark’s Orsted, Dutch firm GasTerra, and giant energy Shell for its German contracts.

These measures have fueled fears of a harsh winter in Europe. Authorities in the region are now scrambling to stockpile natural gas supplies in underground storage. OPEC+ agreed earlier this month to increase output by 648,000 barrels per day in July, or 7% of world demand, and by the same amount in August. It is an increase from the earlier goal of adding 432,000 BPD per month for three months till September. However, markets should not assume that supply would recover by that policy.

While OPEC+ members’ production limits have steadily been reduced, most have failed to grow output at the same rate.

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Europe worried about gas shutdown

European leaders are increasingly anxious about the risk of a complete cutoff of the Russian gas supply, with Italy requesting a fresh meeting to discuss the issue.

Gazprom, Russia’s state-backed energy supplier, has recently lowered its gas deliveries to Europe by almost 60%, forcing Germany, Italy, Austria, and the Netherlands to signal that they may return to coal.

It comes as Europe, which receives around 40% of its gas through Russian pipelines, wants to lessen its reliance on Russian hydrocarbons as quickly as possible in response to the Kremlin’s nearly four-month-long offensive in Ukraine. Reduced gas flows have heightened fears that the EU will enter a difficult economic phase. Berenberg analysts stated that the latest gas price reduction meant their new base case for Europe was a recession.

So far, EU leaders have declined to discuss the risk of a recession or a new economic crisis, but they have agreed that next winter will be brutal.

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Oil pares weekly loss

It suffered its first weekly fall since April as traders assessed the potential of a worldwide economic slowdown. West Texas Intermediate crude oil soared above $106 per barrel. This week, the US benchmark fell around 2.7 percent, putting prices on track for their first monthly dip since November.

On Friday, oil prices were led higher by a tall structure, indicating that the physical market remains solid. In the Middle East, Murban crude was down more than $10 over the previous two months, a historic figure indicating a severe supply shortage.

Still-high refined product prices indicated a continuing demand draw, implying that the recessionary fears that have impacted prices for much of this week haven’t yet filtered through to the pump.

Oil market backwardation, a positive trend in which short-term prices move above longer-term ones, has recently increased, indicating the current tightness. Brent’s rapid spread was $3.77 per barrel, up from $2.73 a week ago.

It is due in part to the continued high demand for real-world barrels. Cargoes for Asian buyers are fetching massive premiums above benchmarks for August loading, indicating confidence in demand in the coming months.

Oil’s advance stalled earlier this month due to growing anxiety about a worldwide downturn, as central banks, including the US Federal Reserve, raised interest rates to combat runaway inflation. Prices have fallen despite signals that energy markets will remain tight in the short run as the Ukraine conflict continues and supply uncertainties loom.

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