Oil prices held steady at around $90 a barrel on Tuesday as investors weighed the impact of high energy costs on the global economy. The market was supported by tight supplies and geopolitical tensions, but also faced pressure from slowing demand and rising COVID-19 cases.
Tight supplies and geopolitical risks
Oil prices have been on an upward trend since late June, driven by output cuts by OPEC+ and its allies, as well as unilateral production curbs by Saudi Arabia and export restrictions by Russia. Some refineries in the Persian Gulf are expected to further tighten supply by consuming more regional crude to refine diesel.
The market also faced geopolitical risks, such as the ongoing nuclear talks between Iran and world powers, the political turmoil in Libya, and the tensions between China and Taiwan. These factors raised the possibility of supply disruptions or conflicts that could affect oil flows.
Slowing demand and rising COVID-19 cases
However, oil prices also faced headwinds from slowing demand and rising COVID-19 cases. The high energy costs have raised concerns about the impact on the global economy, especially in emerging markets and developing countries. Some analysts have warned that oil prices could reach $100 or even $120 a barrel, which could trigger a recession or stagflation.
The resurgence of COVID-19 cases, especially in Asia and Europe, has also dampened the outlook for oil demand. The spread of the Delta variant and the emergence of new variants have posed challenges for the vaccination campaigns and the reopening plans. Some countries have reimposed lockdowns or travel restrictions, which could curb oil consumption.
Outlook and implications
According to JPMorgan economists, if oil prices stay elevated, they could lower global GDP growth by 0.5 percentage point over two quarters. However, they also forecast that oil prices will drop back to $86 a barrel next quarter, in which case the oil shock will fade quickly.
Goldman Sachs economists, on the other hand, said that higher oil prices are a manageable headwind for the US economy, though they lowered their GDP forecast fractionally. They also raised their oil price forecast to $90 a barrel by the end of the year, up from $80 previously.
The high oil prices have also sparked debates about the need for more investment in renewable energy and energy efficiency, as well as the role of carbon pricing and taxation in addressing climate change. The high oil prices have also increased the inflationary pressures and the policy dilemmas for central banks.