Oil prices have fallen but remain volatile

August 26th, 2022

Since the middle of June, oil prices have fallen more or less steadily, but they remain volatile. One of the researchers at www.oilprice.com, Julianne Geiger, kept a close eye on oil prices this week, reporting that they were climbing after an unexpectedly significant drop in petroleum inventories. Her article, Oil Prices Rise on Major Crude Inventory Draw, cites data provided by the American Petroleum Institute. It reported that the draw was 5.632 million barrels for the week that ended August 19, which was more than 10 times the amount some analysts anticipated.

A decade of data shows stability in petroleum stocks until recently. The federal government has been dipping into the SPR for years; other stocks have been falling more or less steadily since June 2021.

The entire stock was reasonably stable, never far from 1,100 million barrels, falling slowly until June 2021. It has been on a faster slide since then and is approaching 800 million barrels.

The stock includes the Strategic Petroleum Reserve (SPR), which has been decreasing since Congress authorized SPR sales in 2015 to fund the deficit. Its maximum capacity is 714 million barrels, and it rarely contained less than 690 million barrels until 2017. The SPR’s volume has fallen because of sporadic sales since then and, more recently, a daily reduction. A plan announced on March 31, 2022, called for the release of 1 million barrels per day for 180 days. Its volume currently is around 450 million barrels.

Geiger stated that WTI was up about $7 per barrel for the week. This trend is worth watching, especially given the increased price volatility since Russia invaded Ukraine on Feb. 24.

This exaggerated graph of the spot price of WTI shows a substantial increase in price volatility since Russia invaded Ukraine. Before the invasion, prices varied by about $12 over each calendar month. Since then, they have varied about 50 percent more, $18 per barrel.

Of course, the petroleum price and its volatility are influenced by a multitude of other factors. The number of rigs in operation, tracked by energy technology company Baker Hughes, affects supply, affecting the price. The tally was 762 as of August 19, a decrease of one unit from a week earlier. Since 2000, the number of rigs in operation has varied from a low of 244 (August 2020) and a high of 2031 (August 2008).

Oil prices also have an annual cycle, climbing during the summer months when motorists consume more gasoline. It tends to hit bottom in December.

When will the crude price get back to normal? It won’t. The pandemic scrambled supply chains, and the likely outcome is a long-term and essentially permanent effect on transportation and logistics. Also, the war in Ukraine will change Russia’s position as an energy supplier, permanently reducing the global supply of petroleum and natural gas.

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