Dan Yergin on falling oil prices despite tight supply, tensions in Russia

Energy expert Dan Yergin said there are two reasons why oil prices have fallen over the past month despite a still tight market: the Fed and the Russian war in Ukraine.

Oil prices had been on the rise since last year, peaking after Russia launched an unprovoked war against Ukraine. But since late May, Brent has fallen from over $120 a barrel to the latest trade at about $109, or about 10% lower. West Texas Intermediate futures are down more than 9% over the same period.

Yergin, vice chairman of S&P Global, said the US Federal Reserve is choosing to chase inflation, even at the risk of the economy slipping into recession, and that this is “easing its path to the oil price.”

On Wednesday, Federal Reserve Chairman Jerome Powell told lawmakers the central bank is determined to cut inflation, even as he acknowledged a recession could occur. Achieving a “soft landing,” in which policies are tightened without severe economic conditions such as a recession, will be difficult, he said.

“The other side of it… 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 hardships that will break the coalition,” Yergin told CNBC’s “Squawk Box Asia” on Friday.

Russia has limited gas supplies to Europe through the Nord Stream 1 pipeline and reduced flows to Italy. Moscow has halted gas supplies to Finland, Poland, Bulgaria, Danish Orsted, Dutch GasTerra and energy giant Shell for its German contracts, all over a dispute over the payment of gas for rubles.

Those actions have fueled fears of a difficult winter in Europe. Authorities in the region are now making efforts to fill the underground storage facility with natural gas deposits.

Crude oil demand issue in China

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

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

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

The magnitude of the recovery and reopening will impact oil demand, but that uncertainty has [oil] price won’t go up,” Yergin said.

Will the supply recover?

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 more than the original plan to add 432,000 bpd per month for three months through September.

“We think OPEC+ will then move to a more liberal approach and allow the few members with additional capacity to produce more,” Edward Gardner, a commodity economist at Capital Economics, said in a note Thursday. He commented on OPEC+’s policy after it finished unwinding pandemic-related supply restrictions in September.

That could lead to Brent prices falling back to about $100 a barrel by the end of the year, he said.

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

While production quotas for OPEC+ members have been gradually relaxed, most have failed to increase production so quickly, Gardner said.

“Most other members do not have the capacity to increase production in the short term. We believe that some members, particularly Angola and Nigeria, are likely to see lower production in the coming months as years of underinvestment continue to plague production,” He wrote.

— Sam Meredith and Evelyn Cheng of CNBC contributed to this report.

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