Oil prices have fallen by a quarter since June and could fall further if a nuclear deal with Iran materializes as it would bring more crude to the market, but inflation remains stubbornly high.
Crude oil prices rose to $140 a barrel in early March after Moscow invaded Ukraine, raising fears that Western sanctions would severely limit supplies from Russia, a major producer and exporter.
But traders are now concerned about demand due to various factors, including recession fears, a strong dollar and weak Chinese oil imports during the country’s Covid lockdowns, said Giovanni Staunovo, a commodities analyst at UBS Bank.
Oil prices are fixed in dollars, so any rise in the currency makes kegs more expensive for importers using other currencies.
In China, “oil demand took a hit as processing of crude oil imports was weak in July,” although inventories are still rising, said Geordie Wilkes, an analyst at Sucden.
Brent, the international benchmark, has fallen to $95 while WTI, the main US contract, is around $90 – and fuel prices at the pump have fallen in the United States.
However, UBS expects Brent prices to rise back to around $125 by the end of the year as Russian exports fall, Chinese imports rise and western countries stop tapping their strategic reserves, Staunovo said.
– Iran wildcard –
However, the market could fall again if Tehran secures a nuclear deal that would allow the country to boost its exports, currently restricted by sanctions.
This could add about a million barrels a day to the market.
“Iran was able to quickly bring capacity back online last time, and that shocked the market,” Wilkes said.
The European Union and the United States said Tuesday they were studying Iran’s response to a “final” draft deal to revive the 2015 nuclear deal with the major powers.
“We continue to believe that a deal is unlikely in the short term,” experts at investment firm Goldman Sachs said in a statement, adding that Tehran can live with reduced export volumes as long as prices remain high.
“Announcement by Iran that it would show readiness for nuclear talks, in our view, is likely to prolong further ongoing discussions before potentially more disruptive countermeasures by the US and its allies,” Goldman Sachs experts said.
“The US is similarly motivated to prolong negotiations because tighter enforcement of sanctions would exacerbate oil shortages.”
Iran’s return to the market would drop prices by $5-$10 a barrel in 2023, experts say.
– “The world has changed” –
While lower crude prices have eased the pain at the pump, analysts say it may not be enough to tame inflation, which has hit multi-decade highs in many countries and stoked recession fears.
Natural gas prices have risen as Russia cut supplies to Europe.
Inflation in the UK accelerated to 10.1 percent in July, buoyed by rising food prices. In the euro zone, they rose by 8.9 percent in July.
While consumer prices in the United States have eased – from 9.1 percent in June to 8.5 percent in July – they remain at elevated levels.
“The world has changed,” Andrew Kenningham, a Europe analyst at research firm Capital Economics, told AFP.
“We used to have a very simple way of looking at energy and electricity prices in Europe using the price of oil. Now we have a much more complex equation with different trends for oil, gas and power,” he said.
In Europe, the recent drop in crude oil prices should reduce inflation by 0.5 percentage points, said Holger Schmieding, chief economist at Berenberg.
Small declines are “important” when inflation is below 2 percent, “but not when inflation is 9 percent,” Kenningham said.
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