The oil price has undergone its fair share of twists and bends this year to date. The spike in energy prices in 2022 so far has been the second-highest on record since the oil shocks of the 1970s.
Except this time it's different. Today, the oil industry is contending with an entirely new set of challenges.
Supply disruptions from the conflict in Europe, rising energy demand amid the impending European winter, and lower oil reserves are all contributing to sustained volatility in the pricing of oil.
Brent Crude oil, the world's oil pricing benchmark, has seen its price gyrate substantially from December 2021. It now trades at US$87.7/Bbl, down from its last peak of US$120/Bbl on 9 June.
Brent's journey to stardom – and then back again – is seen on the chart below, alongside West Texas Intermediate (WTI) crude oil futures for the 12 months to date.
Oil price continues to falter
After a short reversal, the oil price turned sharply on 29 August and has been pushing south ever since.
This week, futures on Brent Crude oil fell to their lowest mark since January this year, as concerns mount around global economic growth and a strong US dollar.
Investors seem particularly concerned at the prospects of a looming recession – especially in Europe – driven by higher energy prices and surging interest rates.
"[T]he market is basing its concerns about what will happen due to sharply higher energy prices in Europe, slowing demand in Europe, and interest rates rising," analysts led by Paul Flynn at Price Futures Group said in a recent note.
Meanwhile, "[w]eak customs data from top importer China and renewed coronavirus-induced restrictions in several cities threatened further economic damages and subdued fuel consumption," Trading Economics says.
"On top of that, lingering global growth concerns amid anticipation of an extended period of tightening financial conditions continued to rattle sentiment," it added.
In addition, the OPEC+ alliance, in its most recent meeting, agreed to slash its daily oil output by 100,000 barrels per day, an unexpected move that added further volatility to the oil price.
Finally, another wave of fresh downside pressure came from weaker import data from China, showing that its crude oil imports fell 9.4% year on year to August.
"The world's largest crude importer brought in 40.35 million tonnes of crude oil last month, equivalent to about 9.5 million barrels per day (bpd), data from the General Administration of Customs showed," Reuters reported.
"That compared to 8.79 million bpd in July and 10.49 million bpd in August 2021."
What the reduction in oil futures says for the level of inflation, energy prices, and cost of living is yet to be seen. Nevertheless, the declines are certainly worth thinking about.
Meantime, the volatility has been a boon for ASX oil shares like Woodside Energy Group Ltd (ASX: WDS) and Santos Ltd (ASX: STO). Their share prices are up 44% and 21% this year to date respectively, whilst broad equity markets have suffered significant drawdowns.
