Will $ 80 Oil Destroy Demand?

Oil prices at $ 80 a barrel are, in theory, good for the budgets of major oil-exporting countries. But prices at their highest level in three years may soon turn out to be too good to be true for producers. Major importers typically set the limit at $ 80 of oil, while the recovering global economy may be unable to support soaring energy costs with higher oil prices on top of record natural gas prices, coal and electricity in mature economies in Europe and developing economies in Asia.

As soon as the oil has briefly touched $ 80 per barrel Tuesday – the highest level in three years – the market pullback began as high prices could weigh on demand.

Global demand for oil is actually strong and is expected to strengthen during the winter due to a switch from gas to oil amid soaring natural gas prices and low gas stocks in Europe and Asia just before the heating season. Analysts and Senior Industry Executives See Global Demand Return to Pre-COVID Levels from the beginning of next year, if not sooner, by the end of 2021.

According to Goldman Sachs and commodity trading giants Trafigura and Vitol, the fundamentals – picking up demand amid a subdued supply response – indicate prices could rise further from here.

However, analysts have also started to warn that $ 80 oil is the price at which the destruction of demand begins.

The major Asian importers of crude oil, China and India, are not happy with oil over $ 70, as they have repeatedly suggested over the past few years. Additionally, oil approaching three-year highs is the last thing the global economy needs now that it is recovering, but still plagued by supply chain bottlenecks and energy costs. high costs reducing the purchasing power of consumers and reducing the profit margins of industries with high operating costs. Oil at $ 80 is rekindling fears of runaway inflation that may not be as transitory as the Fed and central banks would like.

Oil is heading to the point of destruction

One of the first warnings came from Morgan Stanley, which says prices are heading towards “the level where the destruction of demand begins, which we estimate at around $ 80 / b.” Morgan Stanley said so in June and noted this week, as worn by CNBC, “This remains our thesis.

Morgan Stanley analysts Martijn Rats and Amy Sergeant conceded in a Tuesday note that the draws on global stocks over the past month were much higher than in previous months and “suggest the market is more under-supplied. than we generally think “.

Fundamentals may indicate market tightening, but the $ 80 threshold is too big for consumers to ignore.

Major Asian Oil Importers Report Unhappy With $ 80 Oil

Asia’s largest oil importers – China and India – have shown in recent years that $ 70 or more of oil puts strong upward pressure on their raw material costs and inflation. Both countries now sell crude from their strategic oil reserves. The sales did not have a major impact on world oil prices, but they sent a strong message to OPEC + and the market that major crude importers want to ease inflationary pressure on materials and costs at a time when supply chain disruptions are also pushing up costs.

Related: China Further Restricts Energy Use Amid Worsening Energy Crisis

“While the impact of China’s pristine SPR auction on global markets may be small, it signals a major shift in how China likes to use its SPR and potentially influence the behaviors of key suppliers,” said Wood Mackenzie senior consultant Alex Sun. noted Last week.

“At over $ 70 / bbl, crude seems to have become too expensive for Beijing and New Delhi. Although this development has not had an impact on the world oil balance, it sends a strong message. Oil prices reaching $ 80 / barrel will be a pain point for these major crude buyers and are likely to undermine import demand, ”PVM Oil Associates said Wednesday. Remark.

Oil inflation fears

It’s not just the big importers who are unhappy with $ 80 oil.

Energy-intensive industries, particularly in Europe, are already Pain exorbitant prices for natural gas and electricity, with a certain reduction in production in a context of unsustainable costs.

High prices for energy commodities, including crude oil, are expected to further increase inflation, which is already above the targets of the Fed and central banks. Currently, inflationary pressures are seen as essentially transient. However, high and sustained oil prices would put more pressure on prices.

“Inflation is high, largely reflecting transient factors,” the Fed said in its FOMC declaration Last week.

Inflation will moderate eventually, but the current upward pressures are “frustrating” and could last until 2022, Fed Chairman Jerome Powell said. noted at the annual central bank forum organized by the European Central Bank.

“It’s also frustrating to see the bottlenecks and supply chain issues not improving – in fact, the margins seem to be getting a bit worse,” Powell said, as reported by CNBC. “We see this probably continuing next year and maintaining inflation longer than we expected.”

PVM Oil Associates, commenting on what it described as a “premature celebration” of $ 80 oil, said Wednesday:

“Another pitfall of rising energy prices is that it will stimulate already high inflation. Rising oil prices have been one of the main drivers of inflation. And a worsening inflationary situation will weigh on the fragile economic recovery and oil consumption. That brings us neatly to the question of demand destruction. ”

By Tsvetana Paraskova for OilUSD

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