In the last few weeks, the world saw oil prices fall as global demand for oil weakened and the US dollar gained in strength. The decline was, however, halted by supply concerns and that there is some risk of a full 1 percentage point rise by the Federal Reserve. Economists expect the oil forecast to waver based on the unstable economic conditions.
Experts opine that central banks around the world are set to increase borrowing costs this week.
Why are oil prices dropping?
A Bank of America analyst mentioned that they do not expect the oil prices fall to continue much. Broad-based inflation in the US will likely hit the floor on oil prices soon. The market for oil has also been affected by forecasts of a weaker demand, wherein the International Energy Agency stated that there would be no growth in demand in the fourth quarter.
The US Fed is also expected to increase interest rates, which could affect global oil demand.
Brent crude for November rose 65 cents, or 0.7%, to $92 a barrel, while U.S. West Texas Intermediate (WTI) for October was up 62 cents to $85.73 per barrel, or 0.7% percent.
A British public holiday for the Queen’s funeral also limited activity on Monday. Furthermore, gasoline prices have declined for 14 straight weeks after a record high of $5.01 per gallon on June 14.
Bank of America’s analysts believe oil prices will top $100 per barrel by the end of the year and remain there throughout 2023, leading to more tough times for consumers. On Monday, Brent crude, the international benchmark, traded at $91 per barrel after sinking to $88 earlier this month.
What is the outlook for oil prices?
Bank of America’s analysts state that demand for oil has been low in Asia for 2022, mainly due to COvid-19 lockdowns and heatwaves in China. As the industry rebounds next year, oil prices will move along with it.
In a report, the bank’s analysts wrote that the reopening of Asia will easily drive up demand in 2023. They expect Asian oil demand to account for as much as 86% of global growth in 2023 in comparison to 19% in 2022.
On September 5, the Organization of Petroleum Exporting Countries and allies led by Russia, also called the OPEC+, agreed to reduce oil production as it braces for a global slowdown. OPEC+ will cut down its output by 100,000 barrels per day from their production targets for October, due to fears of oversupply and weak demand.
In its August market report, the OPEC slashed its own estimate of global demand for the cartel’s crude oil by 300,000 barrels per day for 2022, and by the same amount for 2023. Internal documents show that the OPEC+ also fell short of its oil production target in August by 3.83 million barrels per day. Global oil forecast has also been hit with trouble in terms of supply chain disruptions and inflation.
How does falling oil prices affect the economy?
When oil prices fall, it usually has a direct impact on fuel costs. As the cost of transport tends to come down, consumers also have more discretionary income and have higher purchasing power.
However, since oil is an internationally traded commodity it has a bearing on the global economy. It can lead to inflation and higher rates of economic growth.
Falling oil prices also stimulate fears of a recession and affect every country differently. If oil prices fall sufficiently, it can also cause firms to buckle under bad debts and in extreme cases go out of business. This will lead to a loss of jobs and investment. ANZ analysts also pointed out that the market still has European sanctions over Russian oil.
Economists and analysts continue to warn that global inflation and escalating geopolitical tensions can blow the lid on oil prices anytime in the future. As such, global oil forecasts must be taken with a pinch of salt. Oil prices will continue to fall in case of weak economic activity. Also, disruption in Russian gas supply has put pressure on oil as Europe deals with an energy crisis.
