InvestorQ : Did Oil prices below $100/bbl on Tuesday and where do you see the oil prices heading?
Niti Shenoi made post

Did Oil prices below $100/bbl on Tuesday and where do you see the oil prices heading?

ishika Banerjee answered.
1 month ago

For the first time since May this year, the price of crude oil in the futures market dropped below $100/bbl. This was on the back of concerns that the world could slip into a recession if the hawkishness of the Fed would continue for more time. Of course, the price did bounce back once again above $100/bbl on Wednesday, showing the hope that things may not really be as bad as it appeared to be. Let me now address the question of where oil prices are headed going ahead.

Currently, there are two extreme views in the market on crude oil prices. On the one hand, there is the bearish view from Citi, which expects the price of crude to touch $65/bbl due to the pressure on demand created by the global recession. They expect this target to be reached by the end of 2022. At the other extreme, Crude has a target of $380/bbl, wherein JP Morgan expects that an extreme supply crunch and a surge in demand could just result in oil futures shooting through the roof. Which of them is more realistic?

Prima facie, the level of $380/bbl is tough to imagine. Even at $150/bbl, majority of the major oil consuming economies could see a sharp spike in inflation and in fiscal deficit. For India, this could almost be an emergency situation as inflation would be well above 25% in that case. Of course, the more practical situation does look like oil touching $65/bbl if the Fed hawkishness actually translates into a slowdown in the global economies. That is already visible in parts and the central banks are yet not relenting.

One more factor supporting the recession argument is Shanghai launched mass testing for Covid in nine districts after detecting cases the past two days. This brings into doubt the much touted demand recovery in one of the world’s biggest oil-consuming countries. The additional testing in China again highlights the risk that more lockdowns could be the order of the day, with larger than life implications for the global supply chains. Weak demand appears to be the big theme so $65 on crude oil looks the more realistic target.

There are other supply concerns that are also cropping up. For example, there has been a widespread oil industry strike in Norway. In addition, major supply disruption in Libya have exacerbated the supply lines of oil once again. To add to all that, it is still uncertain for how long countries like India would be allowed to lift oil from Russia at discounted rates. US inflation this month may be the first indication of whether rate hikes are working. Alternatively, the Fed and most central banks, may just do a rethink.