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How fear of a global recession is keeping oil prices, demand down

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Global oil prices have been oscillating between $100 and $105 per barrel and occasionally dropping to just below $100. In June 2022 Brent Crude oil hit $120. The downward pressure on prices is due to a slowly encroaching global recession driven by persistent inflation, which has been eroding oil demands.

There is a corresponding pressure in the opposite direction driven by a world demanding more oil to drive recovery from the Covid economic downturn, and this is directionally pushing prices upwards. Lately, recessionary pressure appears to be gaining traction over economic recovery.

All this is happening against the backdrop of constrained oil supplies due to limited production capacities. Further, the Ukrainian war and associated sanctions against Russia continue to put pressure on global oil supply chains, resulting in reduced supplies and strengthening prices.

However, should the larger OPEC+ group, or individual members like Saudi Arabia, decide to lump up oil production, prices will go down.

Here in Kenya oil demand appears only marginally impacted by high prices as post-Covid economic recovery activities remain evidently strong despite rising inflation. A flood of cash from election campaigns may also be sustaining oil demand.

Subsidies have also been cushioning consumers from the full impact of global oil prices, thus protecting consumption. When subsidies are withdrawn in the coming months, the full impact of high global oil prices will aggravate inflation.

Is a global recession actually in the making? Recession is an issue that leaders and central bank bosses of many countries are wishing away while anticipating faster economic turnarounds. Hiking of interest rates are a First Aid treatment for economies that are tending towards recession.

Recession is usually defined as declining economic growth in two consecutive quarters. The US, the number one global economy, argues that there are strong mitigating factors that will turn around the economy away from recession .

Europe, due to the war in Ukraine, is facing immense threat of recession considering an ongoing energy crisis characterised by reduced energy supplies, high energy prices, and evidence of reducing industrial production, especially in Germany.

In respect of China, its industrial production is said to be contracting, which is an indication of an economic slowdown. If the US, Europe and China drift towards recession, the rest of the world will be similarly impacted.

The duration of the ongoing war in Ukraine and the associated economic sanctions against Russia will have a significant influence on the trajectory of global economic performance and whether this will dip into a recession, resulting in depressed oil demand and prices.

Any other major geopolitical incident has the potential to increase oil prices while prolonging the recession. And should OPEC+ decide to increase oil production, oil prices will dip and recessionary pressure reduced.

George Wachira, Petroleum Focus Consultants, [email protected]