Oil prices have moved higher in response to the war between Israel and Hamas. Traders are concerned that the violence could intensify and spread, possibly pulling in state actors and threatening oil supply. We think these fears are overdone, but appreciate that miscalculation or over-reach by one or more of the parties involved could see containment unravel very quickly. If prices were to push durably above $100 per barrel this could tip the global economy into recession.
Oil, along with most risk assets, has been buffeted by the turmoil in the US and European banking sectors following the collapse or bailout of a clutch of US banks and the forced takeover of Credit Suisse. Having traded in an $80-90 pb range since the beginning of the year, Brent dropped to $72 pb in late March as the crisis erupted.
Although OPEC data showed global oil demand grew by a healthy 5.3 percent year-on-year in Q1 2022, the agency recently revised down full year 2022 oil demand growth by 12 percent. It is also worth highlighting that OPEC’s current outlook on oil demand is based not only on the assumption that armed conflict in Ukraine does not escalate, but that it eases in the second half of the year.
Global oil demand grew by a healthy 6 percent year-on-year, or 5.6 million barrels per day (mbpd) last year, to an average of 96.6 mbpd. Looking ahead, whilst near-term Omicron related risks remain, so far, the response from governments around the world to surging cases have not been as severe as previous variants. Overall in full year 2022, oil demand is expected to rise by 4 percent year-on-year, to an all time high of 100.8 mbpd.
Brent oil prices averaged $74 per barrel (pb) during Q3 2021, up 7 percent quarter-on-quarter, and 71 percent over the same period last year. Brent oil’s rally has continued into Q4, with the benchmark rising a further 10 percent over September levels. Whilst some supply issues in the US Gulf have contributed to the uplift in prices over the last couple of months, the rally has mainly been a result of rising oil demand.