A paradox seems to be emerging in the oil market. Typically, high prices caused companies to increase investment so they could produce more, boosting their profits and meeting demand. Currently, this may not be the case.
Investors were also concerned that high oil prices could reduce fuel consumption around the world
Oil prices are still above the $100 per barrel mark, but oil production companies are not expected to invest in exploring new fields or starting new drills. Representatives of the world's largest company, Saudi Aramco, are even announcing that the world may face a serious supply crisis in the oil market. Energy companies may be afraid to invest in this sector in the face of pressure related to politicians' attitude toward energy transformation and renewable energy sources - Reuters reports. Thus, energy companies may keep their current profits to themselves instead of investing until regulations and laws lead to a reduction in their market share. This, in a way, may explain why OPEC may care about high oil prices and why the cartel is not increasing production to the levels it declared earlier.
Additionally, investors were also concerned that high oil prices could reduce fuel consumption around the world. Moreover, at the annual economic summit in Davos, political and business representatives highlighted the risk of a global recession in the face of multiple threats. IMF Managing Director Kristalina Georgieva said she does not expect a recession in major economies, but cannot rule it out. Meanwhile, lingering concerns about tight global supply and hopes for a return of demand in China provided some support for oil prices as Shanghai prepares to reopen and lift restrictions.
In contrast, rising oil prices and slowing economic growth will significantly constrain demand growth for the remainder of 2022 and into 2023, according to a May IEA report. In addition, prolonged restrictions in China, where the government is battling the spread of the Covid-19 virus, are causing a significant slowdown in the world's second-largest oil consumer. For the full year, global oil demand is forecast to average 99.4 mb/d in 2022, up 1.8 mb/d year-on-year.
If refiners cannot keep up with the pace of demand growth, consumers could come under additional pressure
With the easing of restrictions in China, increased summer car traffic and further increases in jet fuel prices, global oil demand will rise by 3.6 mb/d from its April-August low. If refiners cannot keep up with the pace of demand growth, consumers could come under additional pressure.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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