Crude oil prices have experienced significant fluctuations since Russia sent troops into Ukraine in February 2022.
In March 2022, prices reached a 14-year high of $140 per barrel, while in March 2023, they hit a low of $75 per barrel. Most recently, prices have fallen to $72 per barrel due to the collapse of major global banks, exacerbating a downward trend.
This explainer analyzes the factors that have contributed to the decline in crude oil prices, including lackluster demand amid inflation and COVID-19 curbs in China, oversupply resulting from weak demand, and Russia seeking new export destinations following sanctions imposed by the EU and the US.
Global banking turmoil
US benchmark Brent crude was trading at $72 per barrel on March 16 due to the deteriorating condition of banking system globally.
The collapse of US-based bank Silicon Valley Bank (SVB)—after depositors withdrew about $40 billion in less than a day—triggered the downward movement in prices of crude oil.
The prices further slumped with another blow to the banking industry with the failure of Signature Bank. Other big banks including Silvergate Capital and Credit Suisse followed suit.
Lackluster demand amid inflation
Oil prices also cooled down on account of declining demand amid global inflation and recession fears.
Even the world’s largest economies including the US witnessed inflation not seen in years. Key central banks around the world hiked interest rates to tame record-high inflation.
Demand has also tumbled owing to the COVID-19 curbs imposed in China— the world’s largest importer of oil—denting the fuel demand. However, with the reopening of the country, analysts expect demand to grow in 2023.
Supply glut
International Energy Agency highlighted in a report that weak demand has created an oversupply of oil in the market. In February, oil stocks built to levels not seen in 18 months, according to the IEA report.
With the demand and supply mismatch, crude oil prices have been trading around $80 per barrel for the last few months.
The oversupply is also caused with Russia looking for new destinations for the export its crude oil after the sanctions imposed by the European Union (EU) and the US on Moscow.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
