After SIX weeks of growth, oil prices have fallen! What will happen to fuel prices in Croatia?

Oil prices in global markets sharply fell last week, for the first time after six weeks of growth, as hopes for a quick recovery of the global economy from the coronavirus crisis diminished, and with it the demand for 'black gold'. In the London market, the price of a barrel fell by 8.4 percent last week, to $38.73, while in the American market, the price dropped by 8.3 percent, to $36.26.

The rise in oil prices, which lasted for six weeks, was interrupted last week due to fears that the end of the coronavirus pandemic may not yet be in sight, given that approximately half of the U.S. states are experiencing an increase in new infection cases. In recent months, oil prices have risen as investors hoped for a quick recovery of the global economy from the coronavirus crisis, thanks to massive fiscal and monetary stimulus measures by governments worldwide. 

The question arises as to what will happen to fuel prices in Croatia. Namely, the exchange rate of the dollar against the kuna continued its downward trajectory, and last week the average exchange rate was 1.5 percent lower. On the other hand, it is questionable whether the six-week increase in the price of a barrel has sufficiently 'translated' to the so-called Mediterranean market and thus to fuel prices in Croatia. 

However, last week investors were disappointed by economic forecasts and messages from the U.S. central bank. The Fed announced on Wednesday, after a two-day meeting, that the U.S. economy could fall by 6.5 percent this year, and grow by 5 percent next year.

It also stated that key interest rates would remain low until 2022 because, as Fed Chairman Jerome Powell said, a long road to recovery lies ahead. Similarly, the weakness of demand in the world's largest oil consumer is indicated by the latest report from the U.S. government on the increase in domestic oil and gasoline inventories last week. Crude oil inventories reached a record 538 million barrels, as cheap oil imported from Saudi Arabia arrived in the country, and demand is still not strong enough.

Inventories increased despite a reduction in production by U.S. producers, which is also indicated by the months-long decline in the number of active drilling rigs in the U.S. On Friday, Baker Hughes announced that the number of these rigs fell for the 13th consecutive week, by five, to just 279, the lowest level since 1940, when these data began to be tracked. This is about 690 rigs or 70 percent less than in the same period last year.

In addition, producers from the Organization of the Petroleum Exporting Countries (OPEC) and allies, the so-called OPEC+ group, have also drastically reduced production.  OPEC+ has cut oil deliveries by 9.7 million barrels per day since early May, which is about one-tenth of the demand from the period before the outbreak of the pandemic.  „The market is at a crossroads. If demand continues to improve, the oil market could rise further. However, if the coronavirus situation worsens, the market will fall,“ says Phil Flynn, an analyst at Price Futures Group.

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