Since the new year, oil markets have witnessed more turbulence and sharp speculation at higher rates. This situation has again sparked concerns that oil prices will be impacted, as global events conspire to muddy things in the short-term.
There are many factors that directly affect these fluctuations, but the most important is the volume of Chinese demand for oil, as the country opens up despite the outbreak of a new COVID-19 mutation. This reflects the systemically vital nature of China’s economy in determining global shifts, as manifested in attempts by some major countries to contain this, including reducing dependence on Chinese imports. These countries also use their influence to encourage the least developed nations to reduce their reliance on aid from Beijing, which had helped increase the growth of Chinese exports.
Fuss over China
This factor has played an influential role in dragging oil prices to sudden dips and gains within short spans. After a rise at the end 2022, oil prices have fallen by 9.5 per cent since the start of this year - the biggest such decline in three decades, due to concerns about the spread of the new COVID-19 variant in China and its possible impact on demand as China is the largest importer of oil. Other reasons include the possibility of the transmission of the variant to other countries and potential closures that may speed up a global recession.
However, oil prices have quickly recovered and compensated most of the losses. The price has risen to $80 a barrel after China opened its borders and cancelled all COVID-19-related travel restrictions.
The economic and health conditions in China have become an incentive for speculators. Evidence is there that demand for oil in the world’s second-largest economy has not been affected much by domestic conditions. Nevertheless, the volume of media fuss contributes to triggering concerns related to demand, to be followed by more positive news, and so on. This circular movement of such news will continue, affecting oil prices in both directions.
No impact on Russia oil
Apart from this, there are other factors that play a role in the fluctuations, such as those related to Russia’s oil exports after Western countries imposed a maximum price cap, though the mechanism has not yet proven effective. Another are the implications from recent snowstorms that hit the US.
The most important conclusion to be drawn here is that it can be said with confidence that the decisions by OPEC+ - especially cutting production by 2 million barrels per day and confirming its continuation in the last meeting - is the right decision, which prevented oil prices from collapsing and kept them at fair rates suitable for producing and consuming countries alike. As a strategic commodity, oil must be marketed in a manner that reflects its importance.
All requests to increase production - and the criticisms against OPEC+ - were not objective. Rather, they were far removed from reality and from the fundamentals required by a market moving on supply and demand trends.