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Why energy prices are heading back to pre-Ukraine war levels

Global energy prices are falling back to levels seen before Russia’s invasion of Ukraine. The most active US WTI crude futures shed more than 30 percent from its recent high in March. Likewise, prices of natural gas and coal also declined to multi-month low on weak demand expectations.

Since the start of Russia-Ukraine tensions, global energy prices have been extremely volatile. Crude oil prices in overseas platforms hit a fourteen-year high on supply concerns. Natural gas and coal prices also jumped to new highs on fears over restricted supplies from the world’s largest fossil fuel exporter, Russia.

Moderate demand outlook amid recession concerns and availability of Russian crude helped to cool down prices currently.

As per the World Bank report, global energy prices will continue to decline in 2023. The bank predicts a 11 percent decline in demand for next year after this year’s 60 percent surge due to Russia-Ukraine tensions. Slower global growth and Covid related restrictions in China could lead to a deeper fall in demand in the coming year.

The bank also estimated lower price targets for natural gas and coal in the coming year. However, it is anticipated that the price of these commodities will double from its five-year average in coming years.

Earlier, the International Energy Agency also set a lower price target for crude oil in the fourth quarter of this year. The agency anticipates a shortfall in demand owing to the ongoing economic slowdown and modest demand in China.

Contrarily, the OPEC producers’ cartel foresees a robust demand growth for oil for the current year and 2023.

A weak demand in China helped to offset major gains in energy commodities. China’s energy consumption has contracted under the weight of its zero-tolerance approach to Covid 19. As lockdowns persist and spread, demand for energy commodities collapses, causing a correction in global energy prices.

China is the largest importer of energy commodities. But, in September, China’s crude oil imports decreased by 2 percent compared to the same period last year. A decline in imports from China affects the overall demand.

Global oil markets are currently well supplied. The west’s threat of the Russian oil ban spooked the global energy markets earlier. However, the European Union continues with the Russian oil embargo focused on helping Ukraine.

The G7 countries also decided to set a price cap on Russian oil to limit Moscow’s ability to fund the war. The G7 proposed price cap on Russian oil would set in on December 5 which is likely to dent major gains in crude oil.

At the same time, since the EU started the ban on Russian oil, Moscow has been curtailing gas exports to Europe. This has led to a sharp rise in energy prices in the region. Now, the European countries are struggling to bring their energy crisis under control.

Looking ahead, energy prices continue to be steady with mild negative bias. Though a slight upturn is expected in crude oil, it is highly unlikely for major rallies. A well-balanced global oil market and demand worries are likely to weigh down prices. A combination of high storage levels, lower demand, and mild weather also ease gas and power prices gradually.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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