OILX - 5 Reasons Why Oil Volatility Remains Elevated
2023-05-15 22:57:00 ET
Summary
- At the beginning of April 2023, WTI Crude Oil surged by $5 in one day to over $80 per barrel as OPEC+ announced production cuts.
- After that, oil fell back, and by early May had dropped below $70 per barrel.
- Russian oil production remains high despite sanctions, with sales moving away from Europe and toward China and India.
By Blu Putnam
The oil market has been volatile. At the beginning of April 2023, WTI Crude Oil surged by $5 in one day to over $80 per barrel as OPEC+ announced production cuts. After that, oil fell back, and by early May had dropped below $70 per barrel.
Several factors explain why the announced production cuts from OPEC+ have not worked to sustain a higher price for oil.
First, Russia is still pumping oil as fast as it can because it needs the money to sustain its invasion of Ukraine. The Russians sell much of their oil to India and China at very steep discounts to prevailing world prices. The availability of inexpensive Russian oil has helped China to resume its upward economic growth path in 2023 as it recovers from its zero-COVID policy of 2022 without pushing up the price of oil. China also has large buffer stocks of many commodities, so faster growth in China tends to lead to increases in demand for oil by as much as a year out.
Then, there is the possibility of a U.S. recession, which has only been enhanced by the debt ceiling debate, combined with the lagged effects of the recent banking turmoil and the Federal Reserve’s push to get short-term interest rates to 5% from near zero at the beginning of 2022.
So far, at least, weak global demand has overwhelmed attempts by OPEC+ to push prices higher. Some new demand may arrive soon if the United States accelerates refilling its Strategic Petroleum Reserve, but for now, considerable uncertainty over the future oil price prevails given the economic concerns.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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5 Reasons Why Oil Volatility Remains Elevated