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Central bankers across the globe will be a happy lot looking at energy and metal prices slide. Oil prices on Tuesday fell to their 6-month lows, with Brent trading below $95 a barrel and WTI below $90 a barrel.
While the war in Europe continues unabated, the impact is falling more on natural gas prices. Russia’s state gas company Gazprom warned that gas prices could spike by a further 60 percent to $4,000/Mcm due to reduced production and exports.
Oil prices, on the other hand, have not been as affected by the war, mainly because Russian crude is finding its way to China, India and even Saudi Arabia.
The present fall, however, has come after economic data from China were released. China’s central bank cut lending rates to revive demand as data showed the economy slowing unexpectedly in July.
China's fuel product exports will rebound in August to near the highest for the year so far after Beijing issued more quotas in June and July, although broader curbs are set to cap shipments at 7-year lows for 2022, analysts and traders said.
However, oil bulls were relieved after the American Petroleum Institute (API) reported a build-up in inventory data even after the Department of Energy released 3.4 million barrels from the Strategic Petroleum Reserves in the week ending August 12.
While oil prices have fallen recently, there is a case for short-term bullishness as the hurricane season starts in the United States, where storms and hurricanes could force shutdowns at Gulf of Mexico production platforms. Furthermore, the release of oil from the strategic reserve is also coming to an end, which can reduce supplies.
Also, there are no signs of an increase in production from US oil producers on account of capital discipline. Nor are the OPEC nations in a position to hike production.
Despite some short-term bullish news, the main factor that will determine oil price direction is economic growth. Recession fears in Europe have intensified with rising natural gas prices. Investor confidence in the German economy is at the lowest level in at least a decade, lower than during the depths of the pandemic.
In the UK, the Bank of England expects the country to enter a recession from the fourth quarter of this year, which will last until the end of 2023.
Traders are also not bullish on oil prices, with net long speculative positions—the difference between bullish and bearish bets—in Brent and WTI dropping to a very low level in early August on fears of recession and softening global economic growth.
Analysts have revised their forecast for oil prices to around $100-110 a barrel, lower than the estimate of $140 a barrel projected a few months ago.
While lower oil prices are good for India as it helps control inflation and the rupee, lower global demand is a bigger threat. India has managed to protect itself, to some extent, by importing cheaper oil from Russia, but there is no escaping lower global demand. We have a report by Vivek Kelkar pointing to the threat of China dumping its steel in the global markets to protect its industry.
Domestic consumption will need to do the heavy lifting for a few more quarters.
While the country is battling inflation, there is good news on the funds front. Goldman sees India bonds getting added to JPMorgan index in 2023.Investing insights from our research team
What else are we reading?
Anshu Jain, banker, 1963—2022 (republished from the FT)A new normal is dividing the global chip industry
Technical Picks:IEX, Tata Steel, Tata Motors DVR, Castor seed and Hindalco Industries (These are published every trading day before markets open and can be read on the app)Shishir AsthanaMoneycontrol Pro