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The periodic monitoring of the crude oil market allows us to understand in an indirect way how the expectations for the global economy can stimulate or discourage the demand for this commodity. A good starting point is understanding who the major players in this market are. In 2021, approximately 43% of the global oil supply was produced by three countries: the United States, which remains the world’s largest producer with 16.6 million barrels per day or mbd, representing 18.5% of the total supply, followed by Saudi Arabia with 11 mbd and 12.2% and finally Russia with 10.9 and 12.2%.


Given the above, it is clear that the most significant structural event for the crude oil market in 2022 was the Russian invasion of Ukraine, which has been ongoing for a year now, and the subsequent restrictive measures taken by Western economies against Russian oil and gas. Initially, the uncertainty on the impact on the global supply of excluding Russia from international markets led the Brent barrel price to climb over 100 dollars between March and August. However, it is worth noting that this trend is starting to reverse, and this reference is currently trading at around 85 dollars per barrel.

Of course, the obvious question is how this has changed when the war in Ukraine continues. Two forces have worked together to cause this decline in the price. One of them is the doubts regarding the actual effectiveness of the sanctions against Russia, and the other is the expectation of a global economic slowdown that will reduce the demand for crude oil.

Chart 1: Brent’s agitated year. Bloomberg Commodities Index


Fortress Russia

According to the expert analysts, the issue with the Western countries’ sanctions was that they initially seemed so harsh and far-reaching that they were expected to have a short-term impact on the Russian economy, which was expected to lead the country to desist from the invasion. Which was the Russian response? The Fortress Russia strategy, a series of policies and measures that the Russian Central Bank has been implementing for years in preparation for a potential scenario of economic sanctions. This strategy consisted in accumulating excess profits from the sale of hydrocarbons to soften the impact of the sanctions. Although this strategy was not 100% successful, it delayed the immediate effect that the countries were expecting.

Another two factors that have weakened the sanctions, especially regarding hydrocarbons, are China’s capacity to increase its purchases from Russia and the high dependence of the European energy scheme. The latter, in particular, made it impossible to “turn off the tap” immediately, but to continue buying from Russia, thus forcing the entire Union to redefine its energetic configuration.


Growth or decrease in 2023?

On the other hand, economic expectations are playing a significant role as, despite the ongoing conflict in Ukraine, the markets now seem to be more focused on the structural aspect of the global economy, as the expectations for 2023 lead the world to a significant slowdown driven precisely by the developed economies, which would translate into a decreased demand for oil. In this sense, the duration and intensity of central banks’ high interest rate policies could further complicate this scenario, making the oil market very sensitive to the central banks and inflation figures, especially those of the U.S. Federal Reserve.

Although at the beginning of 2023, China’s change in policy and its reopening have been very relevant events, even giving some optimism to growth expectations, they have not caused a drastic change in crude oil prices or commodities in general, while waiting to see how real and sustainable these changes will be over time as the impact of the 3.0% growth rate in 2022, the worst since the 1970s for that economy, is assessed.

Finally, two fundamental forces that should be kept on the radar as they will continue to move crude oil prices, at least in the first semester of 2023, are undoubtedly the reopening of the Chinese economy and the increasing blockade imposed on Russia for its invasion of Ukraine, which has now completed its first year. Additionally, another impact in the event of an increase in oil prices is the increase in inflationary levels driven by gasoline prices, which would undoubtedly affect the central banks’ plans to make increasingly smaller rate increases, lengthening the duration of the current cycle of high interest rates and, in the case of the Federal Reserve, helping to maintain a strong dollar, which would undoubtedly affect the region’s currencies.


This report was prepared by Gandini Análisis for Supra Brokers for informational purposes only and should not be construed as investment advice

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