Hello, dear colleagues!
The main event that has occurred in recent days has been the parity of the euro and the dollar. However, for those who constantly monitor financial markets, this event is not news. Parity has been talked about for quite a long time, and those traders who know at least a little about fundamental and technical analysis have managed to make good money on this, with which I cordially congratulate them. A much more difficult puzzle for traders is the dynamics of oil prices, and it is the prospects of the oil market that pose a non-trivial task for us, because the one who solves it will receive fabulous profits, and the loser will pay in full. And this applies not only to you and me, but also to the future of the world order. So, let's try to figure out what is happening with oil and what are its prospects for the second half of the year.
According to the latest published forecast from the US Energy Information Agency - US EIA - the most likely event in the near future will be a decline in oil prices (Fig.1), which we have been observing since June in our terminals.
Fig. 1: Forecast of oil price dynamics from US EIA and NYMEX exchange traders
The increased uncertainty in the short-term outlook is due to Russia's special military operation in Ukraine and lower-than-expected global energy consumption. Setting the outlook for the trend, the US EIA and NYMEX options traders believe that in the second half of the year the price of oil will be lower than in the first half, averaging $104 per barrel of Brent this year and $94 per barrel in the future.
It is also expected that this year the world oil consumption will increase by 2.2 million barrels, reaching the level of 101.6 million barrels per day. At the same time, the production of OPEC countries and the United States will continue to increase, which in the third and fourth quarters of this year will lead to an oil surplus in the market of 1.59 and 0.84 million barrels. At the same time, in the first quarter of 2023, the markets will again experience a daily deficit of 600,000 barrels.
If we take this forecast as a baseline, then in this case, nothing special threatens oil prices. However, there are a number of risks that could lead to a more significant drop in prices, and the main reason is a sharp decline in the global economy.
There is a direct relationship between oil consumption and world GDP growth. At the same time, the price of oil above $80 per barrel leads to stagnation and, ultimately, to a recession in the global economy (Fig. 2).
Figure 2: Correlation of oil price with world GDP and periods of economic development
As follows from the diagram, from 1980 to 2018, an increase in the price of oil above $80 led to a recession in the global economy after some time. However, in fairness, it should be noted that there were only two such periods, in 2008 and 2012, so this is not a sufficient statistical sample. Among other things, it should be taken into account that from 1990 to 2022 the world economy was the economy of the dollar, and the fall in the price of oil to $20 per barrel was one of the reasons that destroyed the USSR.
Without going deep into geopolitics, why not assume that the rise in the price of oil above the level of 80 for just a couple of years will be one of the reasons that destroy the Anglo-Saxon world domination? Nothing good awaits the global economy and the dollar as a reserve currency even if the baseline forecast from the US EIA is realized, according to which the price of Brent oil in 2023 will be $94 per barrel.
Perhaps that is why the G7 countries are so concerned about setting marginal prices for Russian oil? After all, for further economic growth and curbing inflation, they desperately need oil at $80 and below.
By the way, the countries that are members of the International Energy Agency, which unites the main consumers of oil, liked the idea of limiting the marginal price of Russian oil so much that they wanted to lower the price of refined products as well.
The essence of the idea of limiting the marginal price is to buy Russian oil no more than $60 per barrel, and to impose secondary sanctions against those who buy at higher prices. Since, according to American officials, the idea of once again throwing Russia on the dough should appeal to everyone, US Treasurer Janette Yellen rushed to India to persuade the third economy of the world and threaten it with a bony fist, offering various buns in case of joining the agreement. Russia, as usual, forgot to ask at the same time, and not only Russia.
The Bank of India signed an order to use the rupee as the currency of international settlements, and this is where the fun begins. According to the budget rule adopted by the Ministry of Finance of the Russian Federation until 2020, the revenue cut-off price was $40 per barrel. This means that if the price of oil is $60 per barrel, it will bring excess profits to the country's budget. Thus, India and China, within the framework of trade in national currencies, will trade for a joint benefit at 60, and the US, EU countries and Japan will buy oil at 100 and above.
It may be objected that the rupee is a very bad non-reserve currency, but it is not. The rupee allows you to buy consumer goods, including pharmaceuticals, and its volatility over the past year was significantly lower than that of the euro. The euro fell against the dollar by 19%, in turn, the rupee fell by only 7%. The Japanese yen fell by 35%, while the Chinese yuan also fell by only 7%. Moreover, unlike the euro, Russia can spend rupees and yuan.
Summing up this analysis, we can assume with a high degree of certainty that in the second half of the year oil prices will undergo some decline, for example, in the range of 85-100, where they will remain until the market finds a new equilibrium point or finds growth drivers or decline. Among the positive factors are the growth of the world economy, primarily due to Asian countries, which will be supported by relatively cheap energy resources from Russia. Of the negative factors, the price will be pressured by the resumption of Covid-19 lockdowns and the rapid growth of the US recession. At the same time, by the end of the year, amid a future shortage, oil may start a new wave of growth. Despite the local decline, oil is still in an upward trend, and may again return above $100 per barrel. Be careful and cautious, follow the rules of money management.