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Mumbai: Brent is closer to theUS$ 94 mark,withUS$ 106- US$ 107 being critical levels to watch out for. It may be noted here that this level was breached thrice in the last four weeks and Brent has moved lower. This was in response to two specific factors. First, the US Dollar was becoming stronger and naturally the Dollar strength needed to get reflected in the oil price. Second factor is that the demand for oil from the two major consumers that is China and India has been gradually coming down.

The demand for Russian oil by these two countries account for almost half of all oil sales by Russia. It is reported that both countries have been buying oil at a discount and the discount has progressively come down. While this may be a reason, as far as China is concerned the shut down in some of the provinces in the last three months actually accounted for a reduction in oil consumption and therefore, oil demand. While some of the factors may keep oil pricesunder check, the only factor that can bring down oil prices is further strength in the US currency. But in reality, oil prices may continue to give some pain to the global economy due to several reasons

The sanctions against Russia are going to be in place for longer than expected time period, and this will invariably affect the demand-supply dynamics and therefore, the price. Second, the capacity of OPEC+ to expand production and supply is very limited, and it cannot be expanded in the short run as investments have not been done in this sector in the last few years. Finally, though there is fear of a slowdown in global economic growth, it may not be a deep recession, and as such there may not be much demand destruction that is going to happen compared to the situation during the pandemic. We cannot rule out the potential for oil prices to move higher and to re-test the highs seen earlier or at least move closer to US$ 106-US$ 107.

The recent correction is on the back of weak economic data coming out of China and expectations of a production boost from OPEC+. This could be the result of active lobbying by consumers of oil. But it would be worthwhile recalling here that in June there was an agreement to boost supply from 432,000 barrels per day to 648,000 barrels per day, and nothing much happened after that. This is not deliberate but a reflection of the fact that probably only one or two members of OPEC+ actually have the capacity to expand production and that too in a limited way

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