Oil Prices Slightly Declined Last Week, What Will Happen to Fuel Prices in Croatia?

Oil prices in global markets slightly declined last week as investors are concerned about the spread of the coronavirus worldwide, which has dampened hopes for a quick recovery of the global economy and, consequently, demand for 'black gold'. In the London market, the price of a barrel fell by 1 percent last week to $40.90, while in the U.S. market, the price dropped by 1.6 percent to $38.50. Over the past nine weeks, oil prices have risen in seven of them, reaching their highest levels since early March.

At the beginning of last week, prices were rising, thanks to hopes for a quick recovery of the global economy from the coronavirus crisis. However, due to the further increase in the number of new infections in some U.S. states, those hopes faded, and oil prices fell.

What will happen to fuel prices in Croatia cannot be predicted at this moment. Namely, the price of a barrel of crude oil has risen for NINE consecutive weeks, which has partially reflected on the Mediterranean market, and thus on fuel prices in Croatia. Although last week the price of a barrel approached $44, by the end of the week it had dropped to around $40. 

"Markets have overreacted (with optimism), and as the pandemic is not over, we can expect significant fluctuations ahead," analysts at PVM wrote in their market review.

While it seemed that the U.S. had contained the pandemic in May, leading many states to lift restrictions on social and economic activities, the virus is spreading in rural areas and other places where it was not previously widespread. As a result, authorities in Texas and Florida decided to halt the gradual reopening of the economy. These two states are among the largest consumers of gasoline in the U.S. Additionally, the latest macroeconomic data shows that the largest world economies are gradually recovering from the previous sharp decline. However, not as quickly as investors had hoped, and the recession could be deeper than initially expected.

Thus, the International Monetary Fund (IMF) last week raised its estimates for the decline of the global economy this year from the previous 3 to 4.9 percent. It also indicated that developed economies will be particularly hard hit, raising its estimate for the decline of the U.S. economy this year by more than 2 percentage points to 8 percent.

While the spread of the coronavirus worldwide and slower economic growth than expected are pressuring oil prices, they are supported by the recent decision of the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, to extend the agreement to reduce production by 9.7 million barrels per day into July. Support for prices is also provided by indications of reduced oil production in the U.S., as evidenced by the months-long decline in the number of active drilling rigs. 

On Friday, Baker Hughes announced that the number of these rigs fell for the 15th consecutive week, by one rig, to just 265, the lowest level since 1940, when these data began to be tracked. This is approximately 700 rigs or about 73 percent less than a year ago.

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