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What Is The New Normal For Oil Prices?

Oil prices have gone through a major roller coaster since the pandemic and the post-recovery world. During that time period, we saw demand destruction for oil and then a serious shortage of oil. This boom and bust period drove oil futures contract prices to below $10 and then to nearly $140 per barrel. The question for traders and investors is: Where are oil prices are heading next, and what should we expect the new normal to be? When covid outbreak happened, the world came to a standstill, creating a massive surplus of oil supply which drove some of the prices of oil future contracts prices to all the way to negative $40 barrels per day. Oil storage companies had so much oil that they had no space left to store oil, and that adversely influenced the price of oil. To combat the situation, OPEC (Organization of the Petroleum Exporting Countries) took radical steps to cut oil production to balance oil supply and demand. Then, during the recovery from covid lockdowns, the excessive supply of oil evaporated quickly due to the revival of oil demand and lack of supply. In addition to this, Russia invaded Ukraine, which brought speculators into the market. This started to push oil prices higher, and in response, countries like the U.S. started to put serious pressure on Saudi Arabia, one of the key players in the OPEC cartel, to increase production rapidly. OPEC did increase oil production but only in a gradual manner which drove prices to where they are today. The chart below shows the various cycles of oil prices. What is the new normal for oil prices? Central banks are playing an indirect but important role in controlling inflation; the Fed in the U.S. has adopted a hawkish monetary policy as inflation is hitting 40-year highs. Only this month have we seen a modest drop in inflation. The Fed’s hawkish monetary policy has softened economic growth in the U.S., and the theme is similar in the U.K., the Eurozone, China, and Japan. This slowdown in economic activity is having a direct impact on oil demand, and that is driving oil prices lower. I believe that central banks around the globe, such as the Bank of England, the European Central Bank, and the Fed, will continue to maintain a hawkish monetary policy for some time, at least until the end of this year, and that is likely to push oil prices even lower. The new normal in terms of oil supply is likely to be the mid-80s (for both Crude and Brent). Oil prices could visit those levels as early as the end of Q3 -- economic data in the U.S. will also clearly state whether the U.S. economy is heading for a soft landing during that time period, which could potentially create further dark clouds for oil prices. Another important denominator for oil prices is Iran’s potential oil supply. If the Iranian nuclear deal gets a green light, it would likely influence oil prices negatively. In my opinion, odds are increasing for Iranian oil return to the market, given the number of embargoes placed on Russian oil and with the winter season not too far away, which will increase demand. If Iranian oil comes back to the market, it is likely to create more oil surplus as Iran will not be willing to listen to OPEC and obey OPEC’s quota limits. From the long-term perspective, since covid and especially since the war between Russia and Ukraine, there has been a massive push along with gigantic investments in the renewable space, which will fade oil demand even more. The only wild card that can continue to support oil prices is geopolitical uncertainly as it did this year on the back of the war between Russia and Ukraine. With U.S. officials continuing to support and visiting Taiwan, tensions are increasing between China and the U.S. A higher number of military drills are taking place near Taiwan by China. Should that escalate into something much more serious, that would have a dramatic impact on the price of oil. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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