What is the new normal for oil prices?

OPrices have been on a major rollercoaster since the pandemic and the post-recovery world. During this period, we saw a destruction of oil demand and then a severe oil shortage. This boom and bust caused oil futures prices to fall below $10 and then to nearly $140 a barrel. The question for traders and investors is: where are oil prices headed next and what should we expect from the new normal?

When the covid outbreak happened the world came to a standstill creating a massive oil supply glut that pushed some of the oil futures prices down to negative $40 per day. The oil storage companies had so much oil that they had no more space to store oil, which had a negative influence on the price of oil. To combat the situation, OPEC (Organization of the Petroleum Exporting Countries) has taken drastic measures to reduce oil production in order to balance oil supply and demand.

Then, during the recovery from the covid shutdowns, the excess supply of oil quickly evaporated due to the revival of oil demand and the lack of supply. On top of that, Russia invaded Ukraine, which brought speculators into the market. This began to drive up oil prices, and in response countries like the United States began to put serious pressure on Saudi Arabia, one of the main players in the OPEC cartel, to she is rapidly increasing her production. OPEC increased oil production, but only gradually, which drove prices to where they are today.

The chart below shows the different oil price cycles.

What is the new normal for oil prices?

Central banks play an indirect but important role in controlling inflation; the Fed in the United States has adopted a hawkish monetary policy as inflation hits 40-year highs. It was only this month that we saw a slight drop in inflation. The Fed’s hawkish monetary policy has slowed economic growth in the United States, and the theme is similar in the United Kingdom, the euro zone, China and Japan. This slowdown in economic activity has a direct impact on the demand for oil, which lowers oil prices.

I believe that central banks around the world, such as the Bank of England, the European Central Bank and the Fed, will continue to maintain hawkish monetary policy for some time, at least until the end of this year, and it’s probably to push oil prices even lower.

The new normal in terms of oil supply is expected to be the mid-80s (for crude and brent). Oil prices could reach these levels as soon as the end of the third quarter – economic data in the United States will also clearly indicate whether the American economy is heading for a soft landing during this period, which could potentially create new dark clouds for oil prices.

Another important oil price denominator is Iran’s potential oil supply. If the Iran nuclear deal gets the green light, it will likely have a negative influence on oil prices. In my opinion, the chances are increasing for Iranian oil to return to the market, given the number of embargoes imposed on Russian oil and the not too distant winter season, which will increase demand. If Iranian oil returns to the market, it is likely to create more oil surpluses because Iran will be unwilling to listen to OPEC and meet OPEC quota limits.

From a long-term perspective, since covid and especially since the war between Russia and Ukraine, there has been a massive push accompanied by gigantic investments in the renewable space, which will reduce the demand for oil even more .

The only wild card that can continue to support oil prices is geopolitical uncertainty, as was the case this year following the war between Russia and Ukraine. As US officials continue to support and visit Taiwan, tensions are rising between China and the United States. An increasing number of military exercises are held near Taiwan by China. If this were to escalate into something much more serious, it would have a dramatic impact on the price of oil.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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