Oil prices dropped 30 per cent in a week

After Russia invaded Ukraine, global oil prices experienced a dramatic spike. Just over a week ago, Brent crude leaped above $139 per barrel. Analysts warned prices could touch $185, then $200 as traders shunned Russian oil, pushing inflation even higher and adding huge strain to the global economy.

But there’s been a rapid reversal since then. Brent crude futures, the global benchmark, have cratered almost 30 per cent from their peak. They settled below $100 per barrel for the first time this month after shedding another 6.5 per cent on Tuesday.

Stocks soared on the news as well. The Dow gained about 600 points, or 1.8 per cent, Tuesday. The S&P 500 and Nasdaq rose 2.1 per cent and 2.9 per cent respectively.

What’s happening: The unusually sharp pullback has been driven by hopes that Saudi Arabia and the United Arab Emirates could boost oil production, and that demand from China could drop due to new coronavirus restrictions in major cities. This would ease the squeeze on the market.

Yet analysts warn that we’re not out of the woods yet. Oil is still trading significantly above what it costs to produce it, and extreme swings are likely to persist at a moment of huge uncertainty.
“I wouldn’t rule out $200 a barrel just yet,” Bjørnar Tonhaugen, head of oil markets at Rystad Energy, told me. “It’s too soon.”

Following the invasion, oil prices skyrocketed as traders began to see Russian crude exports as untouchable. This sparked concerns about how that supply of between four and five million barrels per day could be replaced, especially as demand for fuel ramps up over the summer.

Over the past week, however, investors seem to be considering whether they went too far, too fast. The United Arab Emirates’ ambassador to Washington said that the country wants to increase oil production, sparking hopes that the Organisation of the Oil Exporting Countries, or OPEC, could intervene after all. Meanwhile, Russia and Ukraine are still talking, even as the war rages.

Plus, China’s commitment to halting the spread of COVID-19, which has led to a lockdown in the tech hub of Shenzhen and new rules in Shanghai, could mean the country needs less energy in the short-term. China imports about 11 million barrels of oil per day.

“People remembered we are still in a pandemic,” Tonhaugen said.
Why it matters: The drop in oil prices has helped prevent gasoline prices from moving higher in the United States. They’ve stopped climbing for now, though a gallon of gasoline still costs almost $4.32 on average.

While $100 per barrel of oil is still extremely expensive, if prices stay in that range, it could ease some fears about an acceleration of inflation. Policymakers would likely breathe a small sigh of relief.
But it’s clear that investors remain unsettled as they process the effects of Russia’s invasion. Russian oil is still being priced at a huge $26 discount to Brent.

And analysts believe the direction of travel has been set. Giovanni Staunovo, an analyst at UBS, expects oil to trade at $125 per barrel by the end of June. For his part, Tonhaugen of Rystad Energy thinks prices could still smash records as the conflict plays out.

“This is the quiet before the storm,” he said.

GETTING DEEPER
Investors have been racing to dump stocks in Chinese companies as worries grow about the consequences of a crackdown from regulators and a spike in Omicron cases. Whether Beijing could provide support to Russia, and be punished by the West for doing so, is adding to the fear.

“There may be growing caution over the potential for secondary sanctions on China,” TD Securities strategist Mitul Kotecha told clients.

The Shanghai Composite dropped almost five per cent on Tuesday. Hong Kong’s Hang Seng fell nearly six per cent. The index has plunged more than 10 per cent over the past two trading sessions.

The declines came despite surprisingly positive economic data from China Tuesday. Retail sales rose 6.7 per cent in the first two months of this year compared to the same period in 2021. Industrial production jumped 7.5 per cent, trouncing economists’ forecasts.

“The momentum of China’s economic recovery has improved in January and February, laying a solid foundation for a good start in the first quarter of this year,” said a spokesperson for the National Bureau of Statistics.
But as China fights its worst COVID-19 outbreak in two years, investors see little reason for optimism.

“With officials ditching targeted containment measures in favor of wholesale lockdowns, this has the potential to be even more disruptive than the Delta wave last summer, which led to a sharp contraction in economic output,” Julian Evans-Pritchard of Capital Economics wrote Tuesday.

It’s not the only reason investors are nervous. The tech giant Tencent could reportedly face a record fine for breaching Chinese anti-money launching rules, sending its stock into free-fall. Other big tech names like Alibaba have been battered after the Securities and Exchange Commission pressed ahead with a crackdown on foreign companies that don’t meet US disclosure requirements. (CNN Business)

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