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Weak demand is likely to lower oil prices in the months ahead

After soaring in the wake of Russia's invasion of Ukraine, oil prices have come back down to earth. Leaving politicians, companies, and drivers everywhere relieved.

Brent crude, the international benchmark, is down 24% from its own June highs, now trading at around $95 a barrel. This figure has dropped more than 30% from the March high of close to $140.

So, why are oil prices falling? The three Rs are to blame: recession fears, Russian resilience, and retreating demand. No one's quite sure what comes next and this economic uncertainty is likely to drive prices lower.

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Oil prices: Recession fears slow the global economy

The key factor pushing prices lower is the growing fears of the world's major economies tumbling into recessions over the next year. When economies slow, the demand for energy naturally drops. In their latest report, OPEC has adjusted their planned output with significant cuts to reflect the expected decreased demand.

Last month, data showed that the US economy shrank for two consecutive quarters in the first half of 2022. Elsewhere, the UK and eurozone look set to slide into brutal recessions.

"All of the talk of recession has caught up with crude prices over the summer, forcing a substantial correction that will be welcomed by those looking on in horror as they fill their cars," said Craig Erlam, senior market analyst at currency platform Oanda.

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What’s next?

Analysts are unsure of what to expect. The City is undecided about whether prices are set to keep falling or to rebound. Analysts at Citigroup have said prices could fall as low as $65 by the end of the year if a nasty recession hits the global economy.

Even without a recession, Citi expects prices to fall to around $85 by year-end. However, the fragility of supply and the severity of the Winter season will be key factors in determining what the price will do.

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Looking forward:

In the UK, forecourts continue to catch up with the wholesale market, leaving fuel prices averaging at around £1.90ppl for diesel. Fuel card customers can expect a further drop in the region of 1.5ppl for next week.

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