Crude Oil

Oil prices well-below Russian invasion levels as demand outlook takes a major hit

Thu 08 Sep 22, 11:17am (AEST)
File photo - Offshore installation in the middle of the ocean at sunset time
Source: File photo - Offshore installation in the middle of the ocean at sunset time

Key Points

  • Oil prices are trading around -10% lower than levels before the Russian invasion of Ukraine
  • Global central banks are rushing to hike rates to fight inflation, weighing on crude's demand outlook
  • Oil prices have the tendency to overshoot towards both the upside and downside

Oil prices were pummeled on Wednesday night, weighed by ongoing lockdowns in China and an increasingly bearish outlook for the global economy.

Brent crude prices fell -5.5% to US$87.7 a barrel, its lowest since January and -11.5% lower compared to pre-Russian invasion levels. The weakening macro environment is slowly catching up to the once unshakeable oil price.

Hike for 'as long as it takes'

Overnight, key Federal Reserve members including Cleveland President Loretta Mester and Vice Chair Lael Brainard reiterated the 'hike until the job is done' rhetoric.

"At some point in the tightening cycle, the risks will become more two-sided. The rapidity of the tightening cycle and its global nature ... create risks associated with over-tightening," said Brainard.

In parallel, Goldman Sachs raised its Fed forecast to now include a 75 bp rate hike in September (versus 50 bp previously) and a 50 bp hike in November (versus 25 bp previously).

"We continue to expect a 25 bp hike in December, which would take the funds rate to 3.75% to 40% by the end of 2022," the investment bank said.

Likewise, the Bank of Canada hiked rates by 75 bps on Wednesday and said that "policy interest rates will need to rise further."

China: Zero-covid or zero-growth

As of Tuesday, approximately 12% of China's total GDP was affected by COVID-related controls on a weighted basis, up from 5.3% a week ago, according to Nomura's chief China economist Ting Lu.

China's crude oil imports fell -9.4% year-on-year in August. Given the wrath of lockdowns now taking place in September, a recovery seems unlikely, at least in the near-term.

EIA estimates

The US Energy Information Administration (EIA) has global oil demand at 99.4m barrels per day (bpd) and global oil supply at 101.26m bpd in August - suggesting a slight oversupply.

The EIA estimates that the oil market was undersupplied by 1.72m bpd in 2021, projects a surplus of 0.56m bpd in 2022 and a return to deficit of 0.22m bpd in 2023.

Overshooting in both ways

"Oil's volatility makes it susceptible to overshooting on the way up and down," said Game of Trades, an independent investment research platform.

"Don't be surprised if oil breaks multiple major supports before finding its equilibrium."

To that point, is down around -36% since its March peak of US$138 a barrel and -11.5% since Russia's invasion of Ukraine on 24 February.

Oil price overshoots
Source: Game of Trades

 

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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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