Dan Yergin on falling oil prices despite tight supply and tensions with Russia

Energy expert Dan Yergin said there were two reasons oil prices fell over the past month despite a still tight market: the Fed and Russia’s war in Ukraine.

Oil prices have risen since last year, hitting record highs after Russia launched an unprovoked war on Ukraine. But since late May, Brent has fallen from over $120 a barrel in the last trade to around $109, or about 10% lower. West Texas Intermediate futures fell more than 9% over the same period.

Yergin, vice chairman of S&P Global, said the US Federal Reserve is choosing to tackle inflation even at the risk of tipping the economy into a recession, and that’s “what’s creeping its way into the price of oil”.

On Wednesday, Federal Reserve Chairman Jerome Powell told lawmakers the central bank was determined to bring inflation down, although he acknowledged a recession could come. Achieving a “soft landing”, in which policy tightens without serious economic circumstances such as a recession, will be difficult, he said.

“The other side … is that Vladimir Putin has expanded the war from a battlefield war in Ukraine to an economic war in Europe, where he is trying to create difficulties that will break the coalition,” Yergin said. to CNBC’s “Squawk Box Asia” on Friday.

Russia has limited gas supplies to Europe via the Nord Stream 1 gas pipeline and reduced flows to Italy. Moscow has cut gas supplies to Finland, Poland, Bulgaria, Denmark’s Orsted, Dutch company GasTerra and energy giant Shell for its German contracts, in a dispute over payment for gas for rubles.

These actions stoked fears of a harsh winter in Europe. Authorities in the region are now scrambling to fill the underground storage with natural gas supplies.

Question of Chinese demand for rough

Yergin said the demand outlook for China, the world’s biggest oil consumer, is also uncertain.

China has slowly reopened parts of the country that were recently locked down due to spikes in Covid cases. It is unclear how quickly Chinese businesses will be able to rebound from these restrictions on economic activity.

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Many economists now expect a slow recovery due to much more transmissible variants, weaker growth and less government stimulus.

The extent of recovery and reopening will impact oil demand, but this uncertainty has “ [oil] price to go higher,” Yergin said.

Will the offer resume?

Earlier this month, OPEC+ agreed to increase production by 648,000 barrels per day in July, or 7% of global demand, and by the same amount in August. That’s up from the original plan to add 432,000 bpd per month over three months through September.

“We believe OPEC+ will then move to a more liberal approach and allow the few members with spare capacity to produce more,” Edward Gardner, commodities economist at Capital Economics, said in a Thursday note. He was commenting on OPEC+ policy after it finished unwinding its pandemic-related supply cuts in September.

That could send Brent prices back to around $100 a barrel by the end of the year, he said.

But markets should not assume that supply will recover in line with this policy.

While OPEC+ members’ production quotas have been gradually eased, most have failed to increase production as quickly in tandem, Gardner said.

“Most of the other members do not have the capacity to increase production in the short term. On the contrary, we believe that some members, notably Angola and Nigeria, are likely to see a drop in production in the coming months. , as years of underinvestment continue to weigh on production,” he wrote.

– CNBC’s Sam Meredith and Evelyn Cheng contributed to this report.

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