Since June 2014, oil prices have experienced an unexpected dramatic fall, shocking many observers and creating significant hardship for oil exporters but bringing massive gains for importers.
Reasons behind oil price fluctuations seem to include both supply and demand factors; typically, prices set for delivery of future months reflect both elements.
The benchmark Brent crude oil price dropped $1.15, or 1.38%, to $82.40 per barrel. At $76.79 per barrel, U.S. West Texas Intermediate futures fell $1.15, or 1.56%.
China’s property crisis
China’s robust growth was driven for decades by its property boom, fuelled by population expansion and rapid urbanisation. Real estate accounted for up to 30% of GDP and made up more than two-thirds of household wealth for Chinese citizens.
China’s housing bubble burst in late 2021 after Beijing introduced tighter lending rules for developers in an attempt to calm the market, sparking liquidity crises at major developers such as Evergrande which defaulted on debt purchased by foreign investors via offshore bond markets.
The Evergrande bankruptcy has sent shockwaves through the global financial system and raised fears of another Chinese recession as property sales have fallen dramatically. Macquarie economists report that new home construction starts have also fallen significantly while outstanding loans continue to shrink; according to them Beijing’s policy responses have focused on increasing demand rather than mitigating supply risks, exacerbating existing home prices decline even more while increasing project costs further exacerbate the downturn.
Middle East violence
Violence between Israel and Gaza threatens to disrupt oil supply chains. Should a wider conflict erupt between them and Iran or Russia, prices could skyrocket even more dramatically.
Other events, like natural disasters, can also influence oil prices. A hurricane hitting the Gulf Coast reduces production while increasing refining costs; additionally, residents displaced may require replacement services, impacting labor costs.
Oil prices are ultimately determined by global supply and demand factors. When major economies grow faster, their energy use increases along with demand; this should cause prices to rise; however, global availability helps limit price pressures; new sources also add supply which lowers prices; traders can speculate about future oil prices by purchasing or selling futures contracts which set their price at any specific point in time.
Europe’s economic slowdown
The euro area’s economic recovery remains fragile. Even as its impacts from Russia’s invasion of Ukraine begin to diminish, consumption-boom fading, inflation remaining steady, and interest rates rising have all hindered growth in Germany, France and Italy.
The European Central Bank has kept interest rates elevated in order to prevent stagflation – a combination of low growth and persistent inflation – but at their next policy meeting on September 14th it remains uncertain whether their rate hikes are enough to return inflation back towards its target of 2%.
Oil price declines may help ease the impact of a slower euro zone economy, although their decline does not yet constitute recession and may take time to fill the demand gap created by an aging continent spending less and driving less. Furthermore, road transportation demand could likely decline over time and reduce crude oil needs as an oil alternative.
Oil supply disruptions
Oil prices have continued to fall despite warnings from Saudi Arabia’s government that global demand could soon outstrip supply, suggesting investors have disregarded efforts by OPEC+ (Organization of Petroleum Exporting Countries + its Allies) and its allies to curb production by cutting production by 2.2 million barrels a day through to Q1 2024.
However, the global economic slowdown looming is exerting downward pressure on oil prices as demand drops off and spending and credit growth drop off as a result of China’s property crisis. This further magnifies this issue for crude prices.
U.S. shale producers have also seen production increase rapidly, further diminishing overseas crude demand. Furthermore, traders fear the recent collapse of a Chinese real estate giant that triggered shockwaves throughout the financial system could trigger bankruptcies and defaults that further dampen consumer spending.
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