Price volatility in the commodity market will remain high

After an extreme price rally between Feb. 25 and March 8, Oil markets entered a correction mode, with prices moving sharply lower as the rally's dynamics retreated.

The increase in volatility across financial and commodity markets and hopes for progress in negotiations between Russia and Ukraine have wiped most of the geopolitical premium from the market, which frightened many speculators.

The price was also affected by more comfortable weather in Europe and signs of normalization of the situation with oil supply, including the actions of leading countries in terms of releasing oil from strategic reserves.

So, Brent crude fell below $100 a barrel on Tuesday (March 15), a week after reaching a 14-year high of $130, and WTI crude dropped to $96.4 a barrel, the lowest closing level since February 28. This marks the first major correction in the oil markets after a period of heightened volatility.

Investors began to recover after a sharp rise in oil prices — the prices started to fall; however, like feverish purchases, sales were also spontaneous and strong. The decline in oil prices was also supported by news that the US is considering the option of lifting sanctions on Venezuelan oil and by news on reaching an agreement on Iran’s nuclear program. Especially after statements by Russia’s Foreign Minister Sergei Lavrov that Moscow had received guarantees from Washington on its ability to trade with Tehran as part of ongoing talks to recover the Iran nuclear deal.

At the same time, the outbreak of coronavirus in China has resulted in a proliferating number of local lockdowns, threatening a slowdown in oil demand. However, such precedents had a very limited impact on demand in the past, so a long-term effect cannot be expected.

In addition, the discounts on Russian oil, which expanded to almost $30 a barrel, led to the entry of cheap oil into the market. In fact, Russian oil is now expected to be sold at about $80-85 a barrel. India is one of the active buyers. Together, this brings down the overall price level.

On Wednesday (March 16), the weekly statistical report from the EIA showed a significant increase in oil inventories by 4.3 million barrels. At the same time, refinery utilization exceeded 90 percent, and gasoline inventories decreased by 3.6 million barrels. The data looks mixed. Oil prices reacted to the statistics with a short-term drawdown, after which they moved to recovery.

The negotiations over the production increase with the UAE and Saudi Arabia during the CERAWeek conference did not end in anything. The delegation of the White House intends to continue negotiations with the countries of the Middle East, but it will be challenging to get a result since relations are pretty spoiled. Against this background, there was a report from the Wall Street Journal that Saudi Arabia and China are now discussing pricing some Saudi oil exports in Yuan.

In its latest Monthly Oil Market Report, OPEC left oil demand growth forecast unchanged at 4.2 mbpd, “for the time being,” but warned that the Ukraine crisis and the spiraling inflation could this year impact oil consumption growth; which “remains under assessment.” This means the demand forecast is subject to downward revisions in the coming weeks.

The IEA report was more pessimistic and expected a decrease in demand by 1 mbpd due to the negative impact of high prices. However, due to the anticipated decline in production in Russia, the agency believes that global oil inventories, which in January were already 11 percent lower than the average for five years, will continue to decline throughout the year.

The range of demand estimates underscores the level of uncertainty that characterizes the oil market in today’s environment. This explains the extraordinary volatility that has been observed since the beginning of March.

However, after negotiations between Russia and Ukraine deteriorated later last week, oil prices once again rose above the $100 per barrel threshold.

On Thursday (March 17), Brent crude jumped by 8 percent to $103.6 a barrel and WTI crude by 7 percent to $101.7 a barrel after the IEA warned on Wednesday that the market could lose 3 mbpd of Russian oil supply starting next month. The jump is also supported by the technical factor, as investors rush to increase long positions as the downward wave fades.

On Friday, the upward movement continued as Brent crude traded near $108 a barrel and WTI $104.7 a barrel, which indicates the preservation of key drivers for price growth.

The mark of $108 a barrel of Brent has already been tested. Such growth could be called impressive if it was not for the extremely high volatility in the oil market since the beginning of March, which raised the threshold of bidders’ susceptibility to price movements.

Considering the recent volatility in the market, then for the new reality, the change in oil prices by 7-8 percent per day is normal. There were only a few trading days in March, where daily volatility was less than 7-8 percent.

In the short term, the main topics that will continue to determine the big movements in the oil market will remain the war in Ukraine, the next meeting of OPEC+, and the outbreak of COVID in China. Given the previous successful experience of the Chinese leadership in localizing and suppressing coronavirus outbreaks, it is expected that the situation will stabilize in the coming few weeks. Accordingly, its pressure on energy demand will also decrease.

The next OPEC+ meeting will be held on March 31, the results of which can present surprises. Accordingly, the stability of the growing trend will be tested to ensure its strength, but for now, growth can be expected to resume after a downward correction.

As for the Ukraine war, both sides have quite active statements about the negotiations so far. If the situation continues to develop in this way, then oil prices will stabilize around current levels. But, if military operations become more active than the negotiation process, the situation in the oil market will again worsen.

For now, the technical picture on the oil market still favors continued growth in oil prices at least until the end of March. In addition, price volatility is likely to remain high in the short term.

• Dr. Namat Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, IEF in Riyadh, and OPEC FUND for International Development. Currently, he is a consultant to a number of companies in the oil industry.