August Brent Rebounds To USD 113.8/bl As Recession Fears Looms -

As the conflict in Ukraine continues, Bjarne Schieldrop, chief commodities analyst at SEB, believes the global economy and demand for oil products are still growing, and while economic growth is slowing, a super-spike in oil prices will take place before we see a recession:

“Last week, the August Brent contract traded down to USD 107/bl on recession fears. Yesterday morning (27 June 2022), it is trading up 0.7% to USD 113.8/bl. A renewed round of Iran nuclear talk kicking off this week may have created some bearish concerns this morning. The gain in the Brent crude oil price aligns well with positive Chinese equities. News that Chinese lock-downs are being increasingly eased should also be taken as a positive in terms of oil demand and prices. New infections are now below 100 cases for close to two weeks with no major city in widespread lock-down, according to Bloomberg. The global economy is still growing and so is oil product demand even though growth is slowing.

“Looking at Brent crude this morning at USD 113/bl it is not a very high price in historical perspective (real, inflation adjusted). And given all the craziness with Russia/Ukraine in combination with the biggest, global refinery stress since 2008, the price of USD 113/bl is even less impressive. Recession fears, alleviated demand pressure due to China lockdowns and large Strategic Petroleum Reserve (SPR) releases of more than 1 m bl/d for six months is probably the main reasons.

“Talking about a super-spike in oil versus a recession, the super-spike should come first and then a recession should follow. While recession fears are mounting, PMIs are falling and consumer confidence is collapsing, it doesn't seem like a global recession fears have weakened oil product demand except for some indications of weaker diesel demand in Europe. Refinery margins are holding up at record levels and that is a good measure indicating that oil product demand is still very strong, i.e., recession ahead but not yet here. So if we think about a super-spike in Brent crude versus a recession then the natural thing time-dynamic wise is that first we'll have a super-spike, then we'll get a recession.

“In a period where global growth is slowing as it moves towards a recession it is indeed still growing. That implies that oil demand is also growing thus pushing harder and harder, though in a fading manner, towards the barrier of supply and refining capacities. That is why commodities in general and oil specifically display late-cycle peaks, just before recession hits.

“We, as well as the market, may think that Russia will now take the Donbas region and then call it a day. But military objectives haven't changed since the start of the invasion, according to Russia. Donbas may not be the end of it. Putin's ambition was clearly to invade and overtake most of Ukraine including Kiev, Poltova and the whole coastline to the Black Sea. Once Russia has overtaken all of Donbas, we should probably expect it to carry on in the south taking all of the Black Sea coastline, then pushing from east towards the west in Ukraine and in the end leave just a small western part, not including Kiev, to be merged with Western Europe. Energy disturbances would then mount way higher than where they are at the moment. That could create a big market surprise and accelerating energy crunch."