Why Crude Refuses to Crash Despite Glut Predictions

A looming oversupply of crude oil is going to cause prices to take a dive as the world moves on to alternatives to hydrocarbons and economic growth remains weak. This has been the message from virtually every price forecaster for months. Yet benchmark oil prices have remained remarkably stable. Some call it a mystery. Yet there is nothing mysterious about it. Forecasts do not reflect real-life supply and demand.

“There is a bit of a mystery,” Vikas Dwivedi, global energy strategist at Macquarie, told the Financial Times this month. “The whole marketplace is looking for enormous surpluses and yet the price isn’t buckling. Instead of $67 a barrel, why are we not looking at $47 a barrel?”

There are two likely reasons why we are not looking at $47 a barrel. One of these reasons is the EU’s and the United States’ continued efforts to decimate Russia’s energy export income via additional sanctions. Since Russia is the second-largest oil producer in the world, right before Saudi Arabia, disruption in its oil flows will affect the global balance of supply and demand—and analysts know it. So do forecasters. However, they are downplaying such geopolitical risks in favor of the argument that the electrification of transport and weak economic growth in many key markets are undermining oil demand. Supply, meanwhile, is growing, according to the forecasters, and apparently this supply growth is completely disconnected from prices—which it obviously is not.

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The second reason why prices are not down all the way to $47 a barrel is China. Millions of words have been spent on media reports suggesting China‘s oil demand is close to peaking, and afterwards it will drop off a cliff. China, meanwhile, has been stocking up on crude, even with weakening demand growth, which is a fact, after over two decades of leaps and bounds. Indeed, Reuters’ Clyde Russell noted in a recent column that China’s crude oil imports have been on the rise since March this year, even if some of the crude goes into storage rather than refineries. Indeed, per Russell, “from March onwards China has been importing crude at a far higher rate than it needs to meet its domestic fuel requirements.”

This has, in turn, been keeping international oil prices stable and higher than many would like to see them, including President Donald Trump, who had cheap gas on his agenda when he took office. On the other hand, Trump strongly believes that hurting Russia’s oil export revenues would speed up the end of hostilities in Ukraine. That, however, would push prices higher, which may be why he has been in no rush to impose additional sanctions on Russia’s energy industry—unlike the EU, which just did, facing an even higher energy bill as it voluntarily gives up Russian oil.