Relief at the Pump: Will Oil Prices Keep Going Down?

Mohit Oberoi, CFA - Author
By

Aug. 8 2022, Published 8:12 a.m. ET

Global crude oil prices have whipsawed in 2022. At one point, it seemed like $100 per barrel was the new normal and oil prices were headed to record highs in the year, something that JPMorgan also predicted. However, crude oil prices have fallen below $90 per barrel. Why are oil prices falling and will they keep going down?

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Crude oil prices have come a long way since April 2020 when WTI futures turned negative for the first time in history. Back then, President Donald Trump cajoled OPEC+ to reach a production cut agreement, which combined with lifting the lockdowns helped support oil prices.

What’s been happening with crude oil prices?

WTI prices rose to around $50 per barrel by the end of 2020. 2021 turned out to be another good year for oil prices, thanks to the global economic recovery. OPEC+ also maintained supply discipline as the member nations, including Saudi Arabia, have given up their obsession with maintaining market share and are happy with a lower share at higher oil prices.

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In the second half of 2021, brokerages started talking about the possibility of $100 per barrel of crude oil, which would have looked like a pipedream a few months before. Eventually, crude oil prices topped $100 per barrel and rose to the highest level since 2008 after Russia invaded Ukraine.

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Why are oil prices dropping?

JPMorgan Chase said that oil prices would rise to $380 per barrel in the worst-case supply cut from Russia. The country has been lowering the gas supplies to Europe. However, the disruption from Western sanctions hasn’t been as severe as many expected. Countries like India and China, both major oil importers, have scaled up their purchase of Russian oil amid the steep discounts.

The bigger concern for oil prices is the demand. Global economic growth has come down sharply from the 2021 highs. While intermittent lockdowns have taken a toll on the Chinese economy, the U.S. economy also contracted in the first and second quarters of 2022.

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Will oil prices keep going down?

Citi expects oil prices to keep going down in 2022. Previously, the brokerage said that crude oil prices would fall to $85 per barrel by the end of 2022. However, in the case of a recession, it predicted oil prices to fall to $65 per barrel by the end of 2022 and $45 per barrel by the end of 2023.

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Citi’s forecast looked in contrast to most other brokerages. Even the legendary Warren Buffett has been loading up on energy companies, which tells us that he expects oil prices to stay higher for longer.

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There are two possibilities for oil prices.

Recession fears have been rising even though the U.S. job market tells us otherwise. The economy added over half a million jobs in July and the unemployment rate fell to 3.5 percent. However, the widening yield curve inversion combined with a fall in long-term bond yields despite the Fed’s rate hikes signal that markets see a recession on the horizon.

If not for the Russia-Ukraine war, oil prices might have headed even lower. As the year progresses, Russia might try to squeeze European gas supplies more during the winter. If that happens, we could see a steep rise in crude oil prices. However, if the conflict eventually subsides, we might see downwards pressure on oil prices.

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