The global crude oil market has been playing a teeter-totter game currently. The prices of both crude oil benchmarks including Brent and WTI have been volatile lately after Russia officially announced Ukraine’s invasion in late February. The prices of the world’s largest traded commodity reached more than a ten-year high level in March 2022 after the Western allies including the United States and Europe put sanctions on Russian oil imports.
However, oil bulls took a breath in mid-March after the world’s largest oil importer; China recorded a sudden bump in Omicron cases.
Currently, the market has been pressured by persistent jitters over the potential recession and a resurge in coronavirus cases in China. On top of that, central banks across the globe are also determined to rein in inflation with aggressive interest rate hikes, expected to subdue fuel demand.
With these events in the backdrop, let’s glance at the factors responsible for the volatility of crude oil prices in a short-term and long-term scenario.
Factors steering short & long-term volatility in crude oil prices:
Several factors can influence the prices of crude oil. Some factors could impact the prices on a long-term basis while others are limited to affect the prices on a short-term basis. Let’s see both types of factors with the help of a diagram illustrated below:
During the global outbreak of Covid-19 in the year 2020, all the operations around became stagnant and this caused economic activities to come to a standstill. With factories shutting their operations and almost next to nil transportation demand, the requirement for crude oil took a toll. This caused a very unique situation in the global crude market as on April 20, 2020; the price of WTI crude (West Texas intermediate) which is amongst the main benchmark for global oil prices went to a negative US$37.63 a barrel on the New York Mercantile Exchange (NYMEX).
This situation was never seen before as historically the price of any physical commodities never went into negative territory. The reason for this negative pricing of crude oil was the fact that it was becoming next to impossible to keep up with the oil supplies and store them, hence the traders who were buying the crude were literally asking for money to keep the physical delivery of crude oil.
Coronavirus situation disturbed the market sentiment of crude oil and with uncertainty in the opening up of economies, the OPEC countries decided to cut down many of their operations and even the Non-OPEC oil-producing countries like the US, Canada, Russia, etc. also halted production from many of their operations. Some of these operations are still left abandoned as it’s very costly to resume a closed hydrocarbon well.
Geopolitical Tension across the globe:
Furthermore, the current geopolitical tension due to the Russia-Ukraine war and the US putting sanctions on countries like Iran is affecting the dynamics of the oil industry.
Position of US dollar:
On top of that, the Federal Open Market Committee (FOMC) raised interest rates by 50 basis points to a new high of 4.25% – 4.50% to tackle inflation thus strengthening the US dollar causing a high level of fluctuations in the crude prices.
Global Economic Condition:
Despite governments across the globe providing various sorts of economic stimulus packages to improve economic growth, these steps have certain repercussions. The biggest consequence is what the current world economies are facing is the possibility of a global recession along with inflation can cause the condition of stagflation. This will have a very negative impact on the world economy and will make things worse for crude oil consumption as it will cause no economic development and squeeze energy requirements.
United Nations climate commitments:
Adding to the fuel is the outcome of the most recent United Nations climate summit that’s the COP27 held at Eqypt where the Conference of the Parties (COP) agreed to follow the set goal of net-zero carbon emissions and maximum of 1.5 degrees of global warming by this mid-century. This may affect the demand for crude oil on a long-term basis.
Adoption of electric vehicles (EV):
An incredible rise in the demand and sale of Electric Vehicles (EV) in the last two years has also hit the sentiments of the crude oil-producing companies and hence caused a bearish impact on crude prices.