Behind the Chaos in Energy Markets
By: Daniel Ghali
December 16, 2022 - 1 minute 30 seconds
Following an epic rally that saw oil prices rise nearly 80% this year, oil markets may close the year in the red as global growth continues to decelerate. This comes only a few weeks after OPEC+ cut their output quotas for the time since the pandemic, despite signs of a more abrupt transition from China's zero-Covid policies, which should support oil demand expectations, critically low oil inventories and a tight outlook for physical markets.
Breaking down the drivers of crude oil, we find that the savage meltdown in prices is associated with a dramatic repricing of supply risks, rather than a sharp slowdown in demand. From a fundamental perspective, supply has notably improved over the past months. Most notably, risks associated with a price cap on Russian exports are dissipating amid significantly watered-down sanctions. Further, Russian exports have notably risen ahead of the sanctions as firms rushed to secure supplies ahead of potential disruptions. Several OPEC+ underproducers have made progress with respect to the operational risks that have constrained their output. Libyan output has also recovered from internal conflict in past months, although the ongoing political crisis still threatens to disrupt the nation's output.
Looking forward, geopolitical and operational risks should continue to support supply risk, as critically low inventories and stretched scare capacity erode the energy industry's buffer against a supply shock. For the time being, we have yet to see signs that the sharp repricing in supply risk has ended. Yet, given the clash between our supply risk gauge and incoming data, it is premature to call for the death of the bull market in energy prices.
Breaking down the drivers of crude oil, we find that the savage meltdown in prices is associated with a dramatic repricing of supply risks, rather than a sharp slowdown in demand. From a fundamental perspective, supply has notably improved over the past months. Most notably, risks associated with a price cap on Russian exports are dissipating amid significantly watered-down sanctions. Further, Russian exports have notably risen ahead of the sanctions as firms rushed to secure supplies ahead of potential disruptions. Several OPEC+ underproducers have made progress with respect to the operational risks that have constrained their output. Libyan output has also recovered from internal conflict in past months, although the ongoing political crisis still threatens to disrupt the nation's output.
Looking forward, geopolitical and operational risks should continue to support supply risk, as critically low inventories and stretched scare capacity erode the energy industry's buffer against a supply shock. For the time being, we have yet to see signs that the sharp repricing in supply risk has ended. Yet, given the clash between our supply risk gauge and incoming data, it is premature to call for the death of the bull market in energy prices.
Senior Commodity Strategist
Senior Commodity Strategist
Senior Commodity Strategist
