Crude oil prices have shed almost all the gains that accrued following the Russia-Ukraine conflict that started 20 days ago. In an exaggerated upward swing last week, crude had touched $ 140 a barrel, aided by fears of supply disruption and huge flow of speculative capital.

However, on Tuesday, Brent faced a dramatic sell-off with rates plunging below the psychological $100 a barrel. WTI too witnessed a similar fall in rates. This collapse was despite continuing geopolitical tension in the Black Sea region amid a structurally tight energy market at the moment.

Key drivers of market

A closer look suggests demand fears and somewhat improved supply prospects are key drivers of the energy market at present. Demand concerns have once again gripped the market following lockdown in parts of China (Shanghai, Shenzhen) in the wake of resurgence in variants of coronavirus cases. Around 30 million people are reported to be facing stringent lockdown.

China is the world’s largest importer of crude oil. The Asian major’s ravenous appetite for oil and massive imports to meet its burgeoning energy needs to fuel growth is well recognized. Yet, China’s imports have started to stagnate since January this year. 

Moreover, in its monthly report published earlier this week, OPEC has maintained a cautious outlook on the oil market but has warned that the war in Ukraine could result in a decline in consumption and investment.

Iran sanctions

On the supply side, there is some positive news. There is strong indication that the US sanctions on Iran may be lifted in which case Iranian oil export will resume, adding to global supplies. Interestingly, even Russia can continue to trade with Iran when sanctions are lifted.

In the US, shale oil production has been rising. Total rig count currently stands at over 660, showing more than 50 percent increase from rig numbers a year ago.

Volatility in prices

Amid all this, extreme volatility in prices has unnerved hedge funds. Many are rapidly exiting from their bullish bets which has exacerbated the price decline. Although there’s no certainty when the war will end, there is high chance of an imminent de-escalation amid peace talks that are currently underway.

Crude price spikes have really put the already enervated Indian economy in a tight spot. Raging inflation in the country is largely imported. The Rupee too is weakening, making the landed cost of imports so much higher.

While the crude oil price collapse is a small consolation for our country, there is nothing to suggest prices will keep falling. If anything, the global energy market will continue to remain volatile until war tensions abate fully and supply risks normalise.

Meanwhile, India continues to buy Russian crude. It is reported that recently a State agency contracted for 3 million barrels of Russian crude at a discount of over $20 a barrel.

Assuming that geopolitical tensions abate in the weeks ahead, crude has the potential to first fall below $ 90 a barrel; and in the third quarter, subject to normal conditions, trade closer to $80 a barrel. Liquidity tightening and rate hike by the US Fed will also provide some tailwind.

(The author is a policy commentator and commodities market specialist. Views are personal)

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