Crude Awakening

After an 8% tumble today, the U.S. price of a barrel of oil is down by almost a quarter in just a month. West Texas Intermediate crude settled at $95.84 today, down from above $120 a barrel as recently as on June 13. But this year's oily mess is far from over.

Prices had been on the rise since last year, as the global economy reopened from Covid-19-related shutdowns and shuttered oil and gas production was slower to come back on line. Then in early 2022, Russia invaded Ukraine, Western allies responded with sanctions and plans to ban exports from the world’s third largest oil producer, and traders applied a geopolitical risk premium to the oil price, should supply be cut even more.

Rising recession concerns—in the U.S., Europe, and China—have been behind the dramatic decline in the oil price over the past month. A large enough slowdown in economic activity would mean less driving, less industrial activity, and less overall need for burning oil and gas. That could bring demand more in line with limited supply, and prices have dropped in anticipation.

But experts caution that the availability of oil remains below demand growth in the near term, and a return to pre-Russia-Ukraine war price levels isn't in the cards this year. December futures contracts still have WTI at close to $90, according to data from CME Group.

Here's Barron's Sabrina Escobar writing today:

Before the invasion, about 60% of Russia’s oil exports went to Europe. That’s changed now that the 27-member bloc has pledged to phase out 90% of Russian imports by the end of the year.

The European Union’s decision won’t be a painless one for its member countries. In 2020, almost 30% of crude oil imports came from Russia, according to the European Commission. Already, Italy and Austria have reported that Russia was tightening natural gas supplies in retaliation for the E.U.’s decision to phase out Russian oil.

Brent crude, the international oil benchmark, lost 7% today, to $99.49 a barrel. President Joe Biden will visit Saudi Arabia later this week, and may ask the oil giant to ramp up production or redirect more exports to Europe. Those moves could help ease pressure on the margins, but won't be a silver bullet.

“The world has never witnessed such a major energy crisis in terms of its depth and its complexity,” said Fatih Birol, executive director of the International Energy Agency, at the Sydney Energy Forum on Tuesday. “I believe we may not have seen the worst of it yet."

Read the rest of Sabrina's reporting here.