Why crude oil prices are back to pre-Russia-Ukraine war levels

There seems more to the easing of oil prices than just recession fears. Oil dropped below $100 per barrel earlier this week and remained under pressure. The market mood cooled and has moved into neutral territory as indicated by the futures positions, respectively the net-length exposure by non-commercial participants.

We believe that the change in sentiment should be described rather as disappearing optimism, not increasing pessimism. With oil prices back at pre-war in Ukraine levels, another interpretation is that the risk premium induced by this geopolitical shock has disappeared largely. That said, there are also meaningful fundamental determinants at play.

With yesterday’s official US weekly oil market statistics, there are increasing signs that the market’s supply situation has begun to improve. Crude oil and oil products in storage swelled above trend in recent weeks, indicating that the tightness would incrementally ease. Domestic production expanded robustly with the shale business offering cash gushers, while demand stagnated, not least as high prices at the pump seemed to dent consumption.

While Europe shunned Russian oil, the supply chain re-routed towards Asia and earlier frictions largely eased. Russian oil still finds its buyers and the earlier feared supply shortfall has not materialised. China’s muted economic activity translates into somewhat lower oil imports as confirmed by data this week, suggesting that China’s energy supplies overall, from oil, and natural gas to coal, are ample.

We see more downside to prices as the mood cycle ebbs and fundamentals ease, i.e., that the trends established as of late persist. That said, market conditions remain prone to any further unforeseen additional supply shock.