Why Have Oil Prices Dropped And What to Make of China’s Reduced Demand

Oil prices have dropped to their lowest level since before the war in Ukraine, after Saudi Arabia and other OPEC+ countries were reported to be considering increasing their output after China’s tightened COVID restrictions.

Will significantly-low oil prices genuinely hurt the outlook for U.S. demand, and what other geopolitical forces are at play? Economist Tim Snyder at Matador Economics give his take on recent affairs.

Tim’s Thoughts

“If you try to figure out what’s going on in the energy complex, there are three simple words that define what’s going on. Those words are demand, demand and demand. I’ve said this many times over the years, but the primary driver for prices in the energy complex is demand, and that is exactly what is driving the price of crude oil, gasoline, and diesel lower today.

This week the Chinese government sent a message to the Saudis to ask them to ship less crude oil, not more, but less crude oil to Chinese ports as they’re still struggling with the COVID crisis. They had a solid fall, and a growing crisis coming this winter, and demand is falling in China.

After this week’s missile threat, from a missile that landed in Poland, killing two people, the geopolitical tension spiked. But then it eased rather quickly when it was determined that the missile strike was an accident. The retreat from full military readiness helped to accelerate the downward pressure on crude oil process that we saw this week.

Additionally, since the [Russians] didn’t launch the missile, there’s no need for NATO to respond, and things are cooling down.”