Oil prices took a dive Tuesday after surfing close to the 2008 record levels, with all major benchmarks shedding market value. The development came as key economies of the world contend with new waves of the coronavirus pandemic, Iran begins to return volumes to the market, and the European Union clings to Russian oil despite the proxy war in Ukraine.
Futures contract for the Brent crude oil grade May Brent crude shed $6.99 per barrel, or 6.5%, to settle at $99.91 a barrel on the intercontinental exchange (ICE). Tuesday’s Brent futures prices were 22% lower than the $127.98 per barrel recorded in March 8.
Also, the front-month April West Texas Intermediate (WTI) crude futures contract fell $6.57 per barrel, or 22% from the $123.70 per barrel of March 8 to settle at $96.44 a barrel on the New York Mercantile Exchange (NYMEX).
Market pundits describe the dip in price as an indicator that the crude oil market has turned bearish, noting that a bear market is technically marked by a drop of 20% or more from a recent high.
Brent crude futures hit an intraday high of $139.14 on March 7 and settled at $127.98 on March 8, the highest levels since 2008.
That was the quickest decline for WTI from a recent high into bear market territory since April 2020, when prices took only one day to fall into a bear market. For Brent, that marked the quickest fall into a bear market since 1996, when it took five trading days to enter a bear market.
The biggest driver behind the selloff in oil has been “investor realization that Europe is not going to wean off Russian oil supply immediately,” said Razaqzada. “Everything else is secondary, including the potential return of Iranian oil supply.”
Iran and world powers have been trying to negotiate a deal to revive the 2015 nuclear deal, which was aimed at limiting Iran’s nuclear activities. A deal would likely lift some U.S. sanctions on Iran, allowing it to contribute more oil to the world market.
Russia’s Foreign Minister Sergei Lavrov told his Iranian counterpart Tuesday that negotiations on reviving the deal were nearing an end, according to Reuters.
Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has “highlighted the risk to the oil demand outlook arising from the Ukraine war and surging inflation,” he said.
In its monthly report released Tuesday, the group of major oil producers said it was leaving its economic forecasts and its estimates of 2022 crude-oil demand and supply growth “under assessment.”
It warned that inflation stoked by the Russia-Ukraine war could undercut oil consumption.
Also pulling on prices was the surging COVID-19 cases in China as resumed lockdown in some key cities of the world’s biggest petroleum importer. China’s southeastern manufacturing hub of Shenzhen, near Hong Kong, has been locked down due to a COVID outbreak, in addition to a COVID lockdown in the northeast of the country.
For now, however, Russia’s continued invasion of Ukraine is “likely to cause more disruption to global trade, if not to energy exports directly,” Marshall Steeves, energy markets analyst at S&P Global Commodity Insights, told market sources.
So “upside risk remains, and the current retracement in prices appears to be profit taking motivated by the Chinese demand concerns,” he said.
Negotiations between Ukraine and Russia also continued after no breakthrough was reached on Monday, as Russian forces continued to pound Ukraine. Apart from the humanitarian catastrophe, the conflict has sparked concerns over global economic growth and sent commodities prices surging across the board.
There are reports that the U.S. could lift sanctions on Venezuelan oil which could ease some supply worries as the war between Ukraine and Russia stretches to a third week.
The market may be “looking to Russian energy flows and thinking that we may not see as big a supply dent due to self-sanctioning as originally expected,” said Smith. “Export loadings of Russian crude and products are continuing as normal, but it is a matter of time before we see the result of halted buying given the lag involved.”
“Regardless of the reason for the recent sell-off, the move lower looks overdone, and prices should rebound as the lack of Russian energy purchases in recent weeks manifests itself in lower seaborne flows,” said Smith.