The Economist: 3 major uncertainties hang over the oil market

Russia's war on Ukraine drove up oil prices;

The turmoil in one of the world's most important commodity markets shows no signs of coming to an end, raising uncertainty.

In a report, the British newspaper, The Economist, said that the fluctuations in oil prices in global markets reflect the existing interaction between the geopolitical and economic forces that are plaguing the world today, starting with war and ending with high interest rates and the Corona virus, noting that even after the conflict in Ukraine;

The price of a barrel of Brent crude oil was close to $114 on March 22, compared to its price at the beginning of the Russian war at about $94, but over the past two weeks, its price has fallen from $128 to $98.

First: Sanctions on Russia and their impact on oil imports

The paper shows that in the first place;

The West imposed economic sanctions on Russia, and the United States banned imports of Russian oil, even in countries that did not do the same;

Potential buyers are struggling to deal with Russian financial intermediaries that have been cut off from global financial supplies as a result of the sanctions, and they fear new ones.

The newspaper quoted the International Energy Agency as saying that international markets may face a deficit of 3 million barrels of oil per day from April as a result, noting that the gap between Brent crude prices and Urals oil is the most prominent example of the turmoil in the global market.

The newspaper notes that this gives Saudi Arabia and the United Arab Emirates enormous leverage as the two countries most able to compensate for a large portion of Russian oil, but so far, the two countries have resisted pleas to increase production significantly, at a time when OPEC and its allies (including Russia) confirmed their current plans. To increase total production by 400,000 barrels per day.

Second: The ability of US shale oil production to fill the shortfall

The newspaper continues, saying that the second uncertainty relates to the ability of American shale oil production to fill the shortage of supplies. During

boom (hydraulic fracturing of oil shale), which lasted from 2010 to 2015, American production rose, causing a decline Oil prices and the weakening of OPEC's control, but the state of the US economy has changed dramatically since then, leaving industrial analysts skeptical that shale oil can rise to the challenge.

The paper explains that in the beginning;

Funding terms were less encouraging than during the 2010-2015 production boom, and the Fed is expected to raise interest rates several times this year and next;

Two-year Treasury yields are down 2%, compared to levels of less than 1% that have persisted during most of the past boom.

And labor shortages are another obstacle to production in the United States. There were just over 128,000 people working in oil and gas extraction in the United States in February, compared to more than 200,000 workers in late 2014. With an unemployment rate of 3.8% and employers struggling to fill already vacant jobs, finding tens of thousands of workers to move across the country will not be easy work.

The industry's attitudes have also changed, the paper says.

As US producers and their potential creditors are becoming more cautious about borrowing, and banks and asset managers are bound by stricter environmental standards, this is one factor driving up costs.

Third: concerns about demand

The newspaper notes that the most disturbing problem of oil price volatility is related to demand, as the strategy of “eliminating the virus” is being tested in China to a large extent, the country has recorded the highest level of infections since the beginning of the epidemic, and tens of millions of people have been locked up in Shanghai and Shenzhen, which are considered One of the country's most important export centers, the Platts Analytics Center for Commodity Research indicates that the restrictions may cut oil demand by 650,000 barrels per day in March, which is roughly equivalent to Venezuela's oil production.

Even before the shutdowns began, the paper sees it;

There have been worrying signs of a slowdown in the Chinese economy, particularly in the real estate sector. Revenues from land sales, considered the most important income for Chinese local governments, fell 30% year-on-year in January and February.

Recently, the Hang Seng stock market index reached its lowest level in 5 years, having fallen by nearly 50% since the beginning of the epidemic. A growing slowdown in the world's largest energy importer means more turmoil in commodity markets.