Oil demand and recession possibilities… Considering that the fact that shapes oil demand is linearly related to global growth expectations, recession concerns about the coming period are expected to explain the decline in prices. The recent downward revisions in the growth forecasts of the World Bank, IMF and global Central banks and the fact that the pricing direction of bond markets and futures markets are calculating higher rates for recession possibilities has accumulated downside risks to the course of the global economy. For this reason, prices, which have been affected upwards by tight supply expectations so far, are likely to decline with the more dominant low demand expectations.

 

Historical comparison of WTI and US EIA monthly oil demand data… Source: Bloomberg

 

Policy tightening, stagflation – recession environment comparison… Looking at the course of the Fed, it is clear that the aggressive monetary policy will continue in the coming months, including September. We will very likely see another 75 bps rate hike in July. The proactive steps that central banks plan to take against inflation reveal the possibilities of a recession or stagflation environment. The fact that there is no energy demand that will be directly shaped by monetary policy and the movement of gasoline prices due to supply conditions that cannot be fully controlled by monetary policy make the functionality of these proactive steps questionable. The Fed's willingness to avoid creating an economic environment that would be more involved in recession and stagflation makes the expectations for the coming period less aggressive.

 

The stagflationist environment of the 1970s and 1980s and the recessionist environment of the 2007-08 period constitute important references at the point of shaping the oil demand and price. The periods of 2008 and 2020 stand out as important recession periods in which demand collapses. The situation in the 1970s-80s, on the other hand, had a supply driven effect. It is necessary to look at the factors of recession in 2008, epidemic in 2020 and stagnation in 1970-80s. The situation in 2022 brings three possibilities before us.

 

Russia and OPEC… The restrictions on the isolation of Russia from the market still constitute an important perspective, but on the one hand, Russia continues to deliver its oil to Europe, and has become the most important supplier of buyers in Asia. Especially in the axis of China, India and Saudi Arabia, Russia offers very important discounts. The gap between Ural oil and Brent oil price has widened due to this discount effect. Currently, Russian Ural oil is priced at $ 79.6, while Brent oil is still at $ 113.5. While Russia can keep production and shipment disruptions to a minimum in this way, another important effect is Russia's perspective of creating its own alternative against the insurance ban. If this works, if the US doesn't block these oil shipments or impose sanctions on countries that buy Russian oil, they will have minimal problems getting oil to Asia.

 

The OPEC dimension should also be looked at. The point at which they increased the quota is lower than the market expects. So they don't seem like they've had enough of a quota increase. If demand is going to collapse due to the recession, increasing oil supply will not work for them as it will bring prices down too much. Therefore, they will continue to be cautious about easing their quota decisions. The USA puts production pressure on the cartel in order to reduce the effect of inflation in its own country, and to reduce the oil price for this. However, domestic inflation dynamics currently seem to be driven by the fuel market effect in the country rather than the Brent oil price. While oil price increases will be reflected as higher gasoline prices, the decline in commodities will probably not be reflected as a similar coefficient decrease in gasoline prices.

 

Brent oil price and Russian Ural oil spread… Source: Bloomberg

 

Conclusion? Fed policies, OPEC production dynamics, Russian shipments, insurance cost, cargo blocks, US fuel price plans… There is an oil price that is affected by many dynamics. The recession will not be a driving variable on its own, as are the supply dynamics. In fact, supply uncertainties may be more decisive at this stage, as they cause cartel members to approach the issue of production quotas more hesitantly. The Fed will bring interest rates closer to their peak very quickly. On the other hand, the war, production quotas and demand uncertainties continue. Since the fight against inflation is on a controversial ground, the spreads will probably widen and the relationship between Brent oil dynamics and domestic fuel prices in the countries will weaken.

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