Oil Sinks To The $80s As Demand Fears Intensify

But the Saudis boost oil prices to record level for Asian customers: File Image/Pixabay

With recession talk and demand fears reaching fever pitch, oil prices on Thursday travelled a predictable route – downward – and a key U.S. benchmark plummeted to below $90 per barrel, a level not seen since prior to Russia's invasion of Ukraine.

The irony remains that the actual physical market is extremely tight around the world, to the point where Saudi Arabia raised its oil prices for buyers in Asia to a record level, and the Organization of the Petroleum Exporting Countries (OPEC) agreed to raise output by a paltry 100,000 barrels per day (bpd) while warning of "severely limited" spare capacity.

Plus, for some countries the scant energy supply is of critical concern, case in point: Germany, where on Thursday refiner OMV Germany said it is "observing a current run on heating oil and diesel….this is possibly due to crisis-driven market shortages and thus excessive speculation and stockpiling."

South Germany, Austria, and Switzerland have had fuel constraints for weeks following disruption in deliveries from regional refineries.

However, if Europe is considered the epicentre of global tightness, then there are definite signs of weakening: this is due to Libya's return to production combined with refineries approaching their seasonal maintenance and the U.S. releasing 1 million bpd from their strategic reserves.

Keshav Lohiya, founder at consultant Oilytics, remarked, "There is no spread that is at super backwardation levels; nothing is eye-popping anymore….the oil markets have come to a normal state, which is surprising given what is happening around the world."

For the record, West Texas Intermediate on Thursday dropped $2.12 to settle at $88.54 per barrel, while Brent fell $2.66 to settle at $94.12 per barrel.

Craig Erlam, senior market analyst at Oanda, said, "Recession talk is getting louder and should it become reality it will likely address some of the imbalance - just not in the way we would like."

The question of what could become of the market in 2023 was addressed squarely on Thursday by veteran industry analyst Paul Sankey, who told media that "It's easy to argue for $100 oil on an ongoing basis starting in 2023….I don't think you'll do much above $150 over time simply because the demand elasticity, the effect of the strong dollar, combined with that kind of oil price, will hold you below that level."

He added that rising costs of global exploration and the lack of refining capacity is an ongoing problem: "That is terrible energy security policy; there's no question about that."

As for the near term, Sankey acknowledged the forecasts of some analysts for $80 oil: "I'm kind of bearish right now to be honest with you."