Behind much of the drop in oil prices is a fall in consumption and the prospect of economic recession

The price of Brent crude oil stayed at US$85 per barrel yesterday, Monday, the cheapest level since mid-January, a month before the start of the war in Ukraine. 

Kristo Aab, an economic analyst at Estonian bank LHV says that compared with the summer peaks, the price of oil has fallen by 30 percent.

Aab said: "One of the main reasons for this is undoubtedly the general fear of a global economic recession, which is prevailing everywhere in the markets, since an economic recession of this kind would certainly spell a lower demand for oil as a highly key industrial commodity."

Compounding this is the cooling of the Chinese economy, decisions by central banks to raise interest rates and the appreciation of the US dollar - the oil market is generally settled in US dollars.

"For some countries, who have their own currencies, oil, and its products, have become so expensive that the ceiling has risen to the extent that they can no longer pay. For this reason also, demand is decreasing," Aab ​​added.

On the other hand, the US has increased supply in recent months, with President Biden opting to release 180 million barrels of crude from strategic reserves, to shore up the market.

However, this does not always translate to significantly cheaper retail fuel at the gas station. 

Mart Raamat, CEO of the oil association (Õliühing), an industry lobby group, cites a comparison with February 22 as an example. If the price of Brent crude oil is now 12 percent lower, the price of diesel fuel is 35 percent higher and the price of motor gasoline is 11 percent higher in euros.

Raamat said: "The drop in oil prices has also started to reach the end products – vehicle gasoline and diesel – but this effect is uneven. Compared with the beginning of September, Friday's closing price for Brent crude oil was about eight percent lower than at the beginning of September; the drop in the price of diesel fuel has been similar, but the price of motor gasoline has fallen only by one-and-a-half-percent."

Fuel consumption has also fallen in Estonia this month. Since diesel fuel is used more by industry, diesel consumption in particular is more affected by economic recession. 

This makes it likely that diesel prices are currently falling along with the price of crude oil. 

Cheaper oil has already brought inflation down in America, Aab said, though this effect may be smaller in Europe, because inflation in Europe is more affected by the current, high prices of natural gas.

"For political reasons, the prices of natural gas are moving in their own way, and there is no sign of an easing of the inflationary pressure," he added.

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