Oil rebounded Wednesday, climbing as much as 2% after taking a tumble on Tuesday amid broad recessionary fears and a surging US dollar.  

Oil prices rose by more than 2% on Wednesday morning with Brent Crude futures up by 2.29% and valued at $105.06 a barrel and West Texas Intermediate (WTI) futures rising by 2.7% and costing $102.14 a barrel. The move after a 9.5% drop for Brent in the Tuesday session, its biggest drop since March, whilst WTI closed below $100. 

Oil prices have been on a decline since the second week of June, seeing Brent Crude futures dip by around 17% and WTI futures fall by a little over 19%.  

Fuelled by recession fears, supply concerns and sanctions on Russian oil and gas imports, oil markets are volatile and are likely to remain so. Here is everything that is driving oil prices. 

On June 3, the European Union adopted a sixth package of sanctions against Russia as a protest against the country’s war in Ukraine. This package included a complete import ban on all Russian seaborne crude oil and petroleum products, which covered 90% of the bloc’s current oil imports from Russia, significantly cutting supplies and sending investors into a frenzy.  

Oil prices surged by around 6% between June 1 and June 8, following the announcement.  

Talks of a resurfacing COVID-19 crisis in one of China’s biggest cities, Shanghai, however, brought an end to the bullish trend and saw oil prices drop once new COVID-19 lockdown measures in Shanghai were announced. This led to strong gains in refined products and supply concerns to falter. In comparison, when China eased its COVID-19 restrictions at the start of the month, oil prices shot up.  

At the start of June, the Organisation of the Petroleum Exporting Countries (OPEC) vowed to increase oil supply to 648,000 barrels per day (bpd), up from the 432,000 bpd expected. This 50% increase aimed to help moderate surging oil prices in the short term.  

But a blockade of oil facilities in Libya, a key OPEC member, driven by political rivalry between two main factions had led to a decrease in the country’s oil production, forcing it to dip by more than 85%. By mid-June, production in Libya stood at 100,000 bpd – down from 1.2 million bpd the previous year.  

Low production in Libya was also joined by a cut in production in Nigeria, another OPEC member, where outages and maintenance curbed output. In addition to that, Angola had also struggled to catch up with OPEC’s plan to raise production.  

In the end, OPEC and allies struggled to meet their oil production targets, managing to pump nearly 3 million bpd less that their collective production target of around 42 million bpd.  

On July 5, OPEC Secretary General, Mohammad Barkindo, said that the industry was “under siege” due to years of under-investment. 

“Our industry is now facing huge challenges along multiple fronts. And these threaten our investment potential now and in the long term, to put it bluntly, my dear friends, the oil and gas industry is under siege,” Barkindo said during an energy conference in Nigeria’s capital city.  

Unfortunately, Barakindo passed away that same night.  

At the same time, Norway has been facing its own energy crisis at the start of July which threatened to affect global oil supplies.  

On July 5, Norwegian oil and gas workers started a strike demanding wage hikes to compensate for rising inflation, but the government was quick to intervene as oil and gas output was due to fall by 89,000 barrels of oil equivalent per day (boepd) on July 5 and by Saturday the value would have surpassed 1 million boe. 

During a Group of Seven (G7) meeting at the end of June, Italian Prime Minister, Mario Draghi, proposed a price cap on Russian oil and pipeline gas and even gained the support of French President Emmanuel Macron.  

The gas cap would operate simply by European countries refusing to pay above a fixed price (to be announced) for Russian gas.  

“Putting a ceiling on the price of fossil fuels imported from Russia has a geopolitical goal as well as an economic and social one. We need to reduce our funding to Russia. And we need to eliminate one of the main causes of inflation. We must avoid the mistakes made after the 2008 crisis: the energy crisis must not produce a return of populism,” the Italian prime minister told the G7. 

Analysts were sceptical of the proposal and oil prices surged in response. Japan’s Prime Minister Fumio Kishida had also put forth a similar proposal in the beginning of July.  

Former Russian President, Dmitry Medvedev, said that a cap on Russian oil would lead to less supplies and could push prices above $300 and even $400 a barrel. 

“There will be significantly less oil on the market, and its price will be much higher. Moreover, higher than the predicted astronomical price of $300-400 per barrel,” Medvedev wrote on social media.  

So, what should we keep in mind? 

On July 6, Shanghai and Beijing ordered a new round of mass COVID-19 testing amid fears of a new outbreak. If China imposes new COVID-19 lockdowns It would be negative for demand, which could keep prices in check.  

The next OPEC meeting will follow on August 1, and investors should keep their eyes open for any statements in the meantime.  

Actions by central banks to combat inflation by cooling demand should also be monitored as recessionary fears have been a factor in the downwards move since June. The Federal Reserve meets again in July and is expected to raise rates by 50-75bps. G10 central banks delivered more hikes in June than during any month in the last 20 years, according to Reuters. 

Meanwhile, traders are also keeping an eye on the FX market as the dollar trades at a 20-year high, which has helped to drive prices down.