Following a week of volatile trading and a drop in the value of the US dollar, investors made assessments regarding the foreseeable demand for crude oil in the coming months.
The per-barrel price from West Texas Intermediate inched upward to around $72 as the trading week began, following its 4% rally on Friday, May 5th.
In general, the price of crude oil has fallen by approximately 11% this year, in light of the US Federal Reserve’s highly aggressive campaign against further inflation to avert a potential recession. The price drop is also seen as a surprising development, given how the Organization of Petroleum Exporting Countries (OPEC+) and its allies have sprung a sudden cut in production. Interestingly enough, OPEC+ ally Russia has yet to decrease its contribution to the global supply despite its threats of reduction.
What Oil’s Weakness Means for the World
Given its links to other financial factors, this recent drop in oil prices may be construed as a major amplification of economic dampening. According to Vishnu Varathan, Mizuho Bank’s Asia head for economics and strategy, this poses the risk of an OPEC+ supply response in the near future, along with attempts to backstop prices.
During trading last week, many speculators ramped up their bets against oil markets, while money managers noted a major increase in short positions in the European diesel market – the most on Brent crude since March of last year.
Likewise, crude and diesel markets in the United States show a marked increase in the weeks following OPEC+’s production cut.
What Drove the Drop?
According to analysts at investment firm Goldman Sachs, the drop in oil prices for three consecutive weeks can largely be attributed to a macro-financial selloff. Indeed, the firm believes that the global oil market could get into substantial deficits come the second half of the year, and this, in turn, could spur price hikes.
Meanwhile, the prompt spread for Brent crude was pegged at $0.26 per barrel in backwardation. This figure has oscillated wildly over the past several days, playing between $0.37 and $0.15 per barrel over the course of last week.