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Harvesting oil prices in 2022… a historic year for black gold

Oil went through a historic year in 2022 after its prices maintained their upward trend most of the year, thanks to the return of travel and the growth in demand for fuel.

The high demand coincided with the decline in supplies against the backdrop of the Russian-Ukrainian war and the OPEC + group cuts in production.

140 dollars a barrel

Brent crude futures rose above $139 a barrel in March after the outbreak of the Russia-Ukraine war, and then rose again later, as buyers struggled to navigate the fallout from two years of refinery shutdowns during the pandemic.

As the year drew to a close, both US and Brent crude futures gave up all of the year’s gains. Here is a review of the reasons:

Decreased demand for fuel

China is the world’s largest importer of crude oil and the second largest oil consumer after the United States.

The strict government intervention to contain the outbreak of the Corona virus during the year 2022 led to a sharp decline in industrial and economic production, as well as the demand for travel.

According to analysts’ estimates, the measures taken by China have reduced the demand for oil by between 30 and 40 percent in the country.

Nor did the beginnings of winter in Europe witness a sharp drop in temperature, which limited the demand for various fuels, including distillates such as heating oil used in power generation and home heating.

Economic activity generally declined around the world, particularly in China and also in the United States.

High interest and the dollar

To fight rising inflation, central banks around the world have taken a series of decisions to raise interest rates to calm the economy and the labor market.

Interest rate increases led to an appreciation of the dollar, which put pressure on oil prices, as a stronger dollar makes the commodity denominated in it more expensive for holders of other currencies.

Overcoming supply concerns

The OPEC + alliance agreed in October to reduce the production target by two million barrels per day, equivalent to 2% of global demand, from November to the end of 2023.

OPEC + stressed that its decision to cut production was due to weak economic expectations, but the move did not support prices, as about half of the OPEC cut is on paper only, given that the organization has been producing less than the target amount in the past period.

Meanwhile, production in the United States rose. Domestic production is growing slowly, but it recently reached 12.2 million barrels per day, which is the highest level since the first wave of the Corona pandemic in March of 2020.

Among the reasons that led to the rise in prices were fears that the series of sanctions imposed by European countries and the United States on Russia would affect its supplies. Although Russia’s production did indeed decline, it did not happen as quickly as might have been expected.

The Group of Seven nations and Australia this week imposed a cap of $60 a barrel on Russian seaborne crude to undermine Russia’s ability to fund its war in Ukraine.

However, Russian oil is already being traded at a discount to this price, which means that this move is unlikely to lead to market turmoil.

put speculators

Hedge funds and investment managers built strong positions in crude oil contracts in the aftermath of the Russia war, but quickly exited the market, removing some of the factors driving oil prices higher.

US data shows that the net long-term positions of hedge funds in Brent crude contracts are near the lowest level in the past ten years, and that the ratio of long-to-short positions is at its lowest level since November 2020.

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