Oil prices are back around the levels they were at before Russia invaded Ukraine, highlighting that a global recession and demand destruction are now the central focus of traders.
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Friday, August 5th, 2022
It is hard to escape from the fact that nearly every single piece of news and analysis appears to be indicating that a recession is looming. Be it the Bank of England’s warning of a five-quarter-long recession drag or the lack of action from OPEC+ on oil production, the bad omens just keep on coming. Inevitably, this has impacted oil prices, too, almost falling back to where they were before the onset of Russia’s invasion, with ICE Brent trending around $96 per barrel. For the first time in weeks, oil futures contracts started to reflect expectations of a weak winter, with monthly spreads halving week-on-week. We are still firmly in backwardation, but it no longer seems as drastic as it had been before the summer.
OPEC+ Increases September Target by a Meager 100,000 b/d. Meeting to set its collective September 2022 production target, OPEC+ has agreed to the lowest monthly quota increase since 1986, at 100,000 b/d, implying that the oil group is still assessing the risks of recession to take more radical steps.
Giant Kazakh Oil Field Halted Amidst Gas Leak. Crude production at Kazakhstan’s 13-billion-barrel Kashagan field was completely halted mid-week amidst fears that pipelines connecting the shallow-water platforms to the shore might be leaking, probably due to equipment corrosion.
UN Head Calls for Taxing “Grotesquely Greedy” Oil. UN Secretary General Antonio Guterres called governments globally to tax these excessive profits and redistribute them, saying oil companies have been making immoral profits on the backs of the poorest people.
OPEC Promises to Have More Capacity for Winter. Saudi Arabia and the United Arab Emirates are apparently ramping up spare production capacity to be able to deliver any significant demands in case of a winter supply crisis, seeking to soften the reputational blow following the 100,000 b/d quota hike for September.
Diesel Stocks Indicate Trouble Brewing Ahead. Whilst the markets at large have been focusing on rising gasoline inventories in the US, middle distillate stocks have been nearing critically low levels with this week’s data showing another 2-million-barrel decline, with total inventories more than 21 million barrels below the corresponding point in 2008.
China Doubles Down on Ultra High Voltage Power Lines. Connecting China’s far western regions where most solar and wind producing plants are located to big coastal cities, the country’s State Grid expects to invest some $22 billion in ultra-high-voltage power lines this year still, boosting the prospects of copper and aluminum for H2.
Russian Government Gives Sakhalin-2 to Gazprom. A Russian government decree issued this week saw Gazprom receiving 50% of the Sakhalin-2 LNG project, with the remained of shares split across those project partners who reapply for their share, with Shell (LON:SHEL) seeking to sell its 27.5% stake before it gets too late.
India Wants to Stimulate Fuel Exports. Just a month after the introduction of fuel export taxes, the Indian government has halved export taxes on gasoline, jet fuel, and diesel, whilst simultaneously hiking taxation on domestically produced crude, raking in $30 per barrel of local output.
Germany Runs into Legal Issues with Gas Levy. The German government acknowledged that it would have to amend its recently adopted energy security law as it turned out it cannot impose the oft-mooted gas levy on consumers who have their gas contracts with fixed prices, roughly a quarter of all deliveries.
Bad News Will Now Come More Frequently in the UK. With the Bank of England expecting the cap on energy bills to soar to 3,500 pounds, the British energy market regulator Ofgem announced it would review the country’s price cap on a quarterly basis rather than twice a year.
Russia Bans Western Firms from Selling Energy Stakes. The Russian government has banned companies from so-called unfriendly countries from selling shares in key energy projects until the end of the year, implying that US major ExxonMobil (NYSE:XOM) will not be able to get out of Sakhalin-1.
Singapore Bans Glencore from Bunkering Pool. The Maritime and Port Authority of Singapore has banned Switzerland-based trading major Glencore (LON:GLEN) from the country’s bunkering market for two months after a March chlorine contamination accident drastically curbed fleet availability.
Chesapeake Seeks Sale of South Texas Assets. US shale-focused oil firm Chesapeake Energy (NYSE:CHK) is reportedly considering a sale of its Eagle Ford shale assets amidst an ongoing shift towards natural gas production, possibly under pressure from private equity firm Kimmeridge Energy for changes.
Nickel Smelting Drops to 5-Year Low. Satellite imagery indicates nickel smelting has dropped to its lowest point globally in more than 5 years of data tracking, with high power prices curbing activity in Europe and Africa whilst China remains hamstrung by weak demand recovery following lockdowns.
By Josh Owens for Oilprice.com
More Top Reads From Oilprice.com:
- OPEC+ To Boost Production Target By 100,000 Bpd In September
- How China Could Send LNG Prices Into The Stratosphere
- How Russian Oil Is Making Its Way From Europe To Asia
The rationale behind my thinking is based on the fact that the global oil market is still in its most bullish and and tightest state with a robust global oil demand and a fast-shrinking global spare oil production capacity including OPEC+’s. The proof is that OPEC+ could only muster 100,000 barrels a day (b/d) in a globally called increase in production.
In normal circumstances, a recession leads to a shrinking global economy and demand destruction. But we are in unusual circumstances. With a tightening market, shortages and a shrinking capacity, there isn’t much for demand destruction to destroy. So we could end up with a unique form of recession with both rising oil demand and prices and a contracting global economy.
It is even possible that professors of Economics may even revise their traditional definition of of recession in the old textbooks of economics to reflect this new form of recession in due course.
I still project that the trajectory for oil prices will continue to head upwards at least for the next five years until global investments in the expansion of production capacity reach fruition.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert
Anyhow natural gas is usually known as the Widowmaker trade for a reason as is true of shorting the Yen.
Long $nee Next Era Energy
Simply most incredible deflation i have ever even imagined now well underway let alone *BEAR WITNESS* to. Talk about Open Outcry alert!