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Oil price debate: Spike or sink?

by Tavaga Invest

The recession seems to arrive early along with the monsoon as there’s a high downpour of crude prices observed worldwide. Once soaring high at $125, it’s now trembling at $100 up to yesterday. 

The reason?

Uncovering the rationales behind this has many points to explain the fall. One of the most common is the slowing down of western and European economies as a consequence of war. Fears prevail worldwide as this may cause an economic slowdown which might eventually hinder the demand for petroleum products and hence less crude demand. 

Overlooking this preconceived notion of the masses, the literate heads at various multinational corporations have poles apart differences in the opinions as to where the crude oil prices are likely to head. 

Clashing the Analyst’s Clan:

As global markets are difficult to predict, similarly, it’s next to impossible for analysts over the globe to conclude on any major economic episode. Be it quoting any price targets for a commodity or commenting on the recession arrivals, each analyst has their own logical take on the matter with proven fundamentals. And we have nothing but to accept their opinions as they are backed by legit past case studies and economic conditions.

In recent, global crude oil prices are the center of attraction as we see a wide difference in the statements and reports of global analysts. Not only a difference in quoting prices but also a clash of opinions on the effect of current warfare on global crude prices has left the retail investors in dilemma as to whom to trust.

For instance, a Citigroup report mentioned that as the recession is likely to hit the global economy by the end of this year, crude oil might collapse to $65 by then. It also hinted that if the trend continues, it may fall further to touch $45 if demand continues to cripple. 

Alongside, the leading global brokerage firm JP Morgan stunned everyone by publishing a startling report anticipating the global crude to show a steeper rise. Its report estimated the crude prices to hit $380 a barrel. It backed this by an extremely unlikely possibility of US and European penalties prompting Russia to inflict retaliatory crude-output cuts. This specifies that if Russia retaliates against the G7 country’s sanctions by cutting its crude oil outputs, it’s likely to surge demand and consequently prices would soar high. 

So, whom to trust?

See, none of the published statements can be challenged as both have proven records to back their statements. It’s just that the point of view varies for both the anticipation. The former one gives a pessimist view about the economic slowdown and shutting down of operations, whereas the latter is optimistic about the increasing demand post-Russia-G7 sanctions. Since both of them are conditional to other factors, let’s see whose bet proves to be valid and who needs to work hard on its analytical skills.

Previous Recession Story…

Such continuous crude price fall imitates one of the greatest economic setbacks of 2008. It started with a real-estate fiasco which slowly spread throughout the economy as a rot. It initially, hiked the commodity prices but not much later deflation entered the space and pulled down all the assets. Especially crude oil and natural gas suffered the most as it’s demand was affected due to low energy consumption as a result of unemployment. 

It was only when the government came to the rescue by employing stimulus that other sectors recovered and so did the energy consumption and crude requirements. This revered the deflation and brought back the crude prices into the normal price bracket. 

Okay, but what about India?

Though there are almost equal possibilities of crude prices moving either ways, India better have its fingers crossed regarding this. The reason is, that we import almost 80% of our crude requirements from abroad and even the slightest spike in the prices would prove to be a foreign trade disaster. In a way, a spike in oil prices would spill raita (or should I say, crude oil) over India’s foreign exchange and balance of trade.

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