THE same question as to the reason for the weakness in oil price, which has reached the current level of $76 per barrel – the lowest this year – is being asked globally, as few months ago, it was above $95 per barrel. At that time, some questions had been raised as to how the world was to cope with such a high level, with the high interest rate and the strong currency value of the US dollar. However, now the concern is the reason for the decline of the oil price to such a low level.

The capping of Russian oil at $60 per barrel by the European Union with the support of G7 is one of the main factors, but it should have raised the oil price and not lowered it. Such a capping as well as the refusal of Russia to accept such a limit without its consent should have forced the oil price to go up, but the opposite is happening.

It was meant to reduce the supply of Russian oil of more than seven million barrels to Europe, USA and other countries that are obligated to stand by their rules. This was what was expected when putting pressure on the oil prices to go above $90 per barrel, but that did not happen. Therefore, the same concern of lower oil price has returned.

Last month, OPEC+ had cut the crude oil production by two million barrels per day. This had shocked the world, which criticized the organization for manipulating oil prices and pushing for higher gains. Despite that, OPEC did not achieve its objectives and the oil price remained below $80 without reaching $90 per barrel, as hoped by OPEC+. There is no single reason for oil to remain below $80 per barrel at the same time of the year, except for maybe the concern over COVID-19’s impact on China’s global growth, which can cause decline and suppress demand for oil.

However, China has now opened up and not taken such actions against COVID-19 patients such as lockdowns or staying isolated in homes. The elements for higher oil prices include not only seasonality and the cold weather, but also the complete lack of oil spare capacity.

This pushed the US administration to release more oils to ease domestic gasoline prices. Strange enough, the domestic gasoline price is down from its peak of $5 per gallon to $3.29 today, which frees the USA administration from domestic pressure and allows it to live in peace with the people for now.

There is no single explanation for the weakening of oil price, other than perhaps the recession or the concern for future recession that is causing us to refrain from any sort of unnecessary expense and reduce costs.

This has become the usual habit, as if we really believe that we all can curtail and cut down on our spending habits. We still could not explain the current weakening in oil prices except for lack of or weak demands. Oil prices must go up to reach an acceptable level between $80 to $85. However, how long will it take to reach that level when it is known that the impact of the Russian oil boycott will not be effective nor enforceable. At such time, OPEC+ decided to push for its target of $80 a barrel or higher.

By Kamel Al-Harami Independent Oil Analyst
Email: [email protected]