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in tuesday's trading, benchmark brent crude oil prices fell below $70 a barrel, the lowest level since december 1, 2021. the economic slowdown in major oil-consuming countries is the main reason for the decline in international oil prices. the decline in oil prices will severely damage russia's war efforts and push the ruble to depreciate. the decline in international oil prices will help chinese companies reduce energy costs while deepening economic deflation.

1. benchmark brent crude oil prices fell below $70 a barrel on tuesday, the lowest level since december 1, 2021.

oil is the blood of the economy. without oil, everything in this world will return to its original state before the industrial revolution. however, economic theory tells us that it is not the importance that determines the price, but the supply and demand relationship.

so, two and a half years ago, putin thought he could hold the world hostage with oil, and he could invade ukraine with natural gas, so he launched a brutal war to invade ukraine. in the early days, it was indeed as putin wished. after the start of the ukrainian war, the price of global oil market soared to a 14-year high within a few weeks, and the price of brent crude oil futures soared from $96.84 per barrel before the war to $139.13. but after the united states sold off its strategic reserve oil and the panic caused by the war subsided, the price of oil fell sharply.

benchmark brent crude prices fell below $70 a barrel in trading on tuesday, falling to a low of $68.68 for the day before closing at $69.44, the lowest level since december 1, 2021.

oil futures prices fell nearly 4% on the day, down about 15% in two weeks, more than 20% from the summer peak, and 28.3% from february 23, 2022, before the russia-ukraine war.

what has stunned the kremlin is that although russia and opec have been playing the game of reducing production to maintain prices since 2023, the market has become increasingly disdainful of this old trick. in fact, oil prices have been below pre-war levels for 26 months since june 2022, and have now returned to the level of less than $70 per barrel of brent crude oil before 2021.

russia's own oil prices have also been unable to counter the volatility of the international market. according to reuters, the price of russian urals crude oil fell below $60 a barrel on tuesday, even though it was selling it to its two friendly countries for $75 in july.

2. the economic slowdown in major oil-consuming countries is the main reason for the decline in international oil prices.

the united states, the middle east, and russia are the major oil exporters on the planet, while china and india are the major importers of "black gold" on the planet. china's economic scale is 4.5 times that of india, making it the undisputed largest oil importer by a wide margin.

since the beginning of this year, the economic recovery of major oil-importing countries has been weaker than expected, and the demand for energy has declined significantly, resulting in a weak global oil market.

in the second quarter, china's gdp grew by 4.7%, lower than the 5.3% in the first quarter and lower than the annual growth plan of 5%. from january to july, the country's tax revenue, mainly from enterprises, fell by 5.4%. the semi-annual reports of the most high-quality enterprises, more than 5,000 listed companies, showed that the revenue of a-share listed companies in the first half of the year was 34.87 trillion yuan, a year-on-year decrease of 0.51%, and the net profit attributable to the parent company was 2.9 trillion yuan, a decrease of 2.4%.

the visible economic weakness is also reflected in the demand for energy. according to data from the general administration of customs, the import volume of crude oil from january to august this year was 293.62 million tons, a year-on-year decrease of 3.1%. among them, in june, it fell by 11% year-on-year to 11.4 million barrels/day. july was the lowest level in the past two years, falling to 10.01 million barrels/day, the lowest level since 9.83 million barrels/day in september 2022.

according to data from third-party agency platts, china's purchases of petroleum products have fallen to a 20-month low this year. denis kissler, senior vice president of bok financial securities, said that weak chinese demand is the main reason for the decline in international oil prices. now the global oil market is considering the prospects of the entire asia and whether asian countries will buy the amount of oil that producers rely on.

3. falling oil prices will deal a heavy blow to russia’s war efforts and push the ruble down.

oil export revenue is the lifeblood of russia's economy, and also the lifeblood and achilles' heel of russia's war economy. so trump often repeats a sentence: "if i am re-elected president, i can drive the international oil price below $40 and completely shut down putin's war machine."

the oil price plunge helped reduce russia's revenue from crude sales to its lowest level since february, highlighting the severe challenges moscow faces as war funding dwindles due to weak global markets.

the price plunge has caused russia's flagship urals crude to fall back to the $60 per barrel threshold, with data from independent agency argus media showing that the average crude price in russia's baltic ports was $60.12 last friday, september 6. the average price continued to fall back to $59.07 on monday.

the value of russian crude oil exports fell to $1.44 billion in the seven days to september 8, from $1.52 billion in the days to september 1. the small weekly increase in exports was offset by a plunge in the price of russia's main crude export. this brought the weekly value of overseas shipments to the lowest level since january.

russian crude exports from baltic ports fell by about $6.30 a barrel on a weekly basis, while exports from the black sea fell by about $5.90 a barrel. prices for the main pacific grade espo fared better, falling only about $2.70 from the previous week. prices delivered to friendly power india also fell, down about $5.90 a barrel, according to argus media.

russia's average oil export revenue in the last four weeks fell to its lowest level since february, at about $1.51 billion per week, a 30% drop from the average of $2.17 billion per week in the first half of the year.

oil prices falling below $75 per barrel for brent would not only threaten the russian budget, which is filled with oil and gas revenues, and thus russia’s war funding, but could also push the ruble further down by the end of the year. in 2024, russia’s fiscal budget is for a price of $70 per barrel, including urals, and the kremlin includes almost the same price in its draft budget for 2025, $69.7 per barrel.

4. the decline in international oil prices will help chinese companies reduce energy costs, but it will also deepen economic deflation.

due to the special oil import channels and special economic situation, the impact of the decline in international oil prices on china is rather complicated.

first, the impact of falling international oil prices on our overall import costs will be discounted.

as the largest oil importer, since part of our crude oil imports are imported through oil pipelines and we have signed a supply agreement with russia, the impact of the decline in international oil prices on our oil import costs will be smaller. for example, the proportion of oil imported through pipelines is about 20%, so if the international oil price drops by 10%, our average import price may only drop by 8%.

second, the decline in international oil prices will help chinese companies reduce energy costs.

although domestic refined oil prices are not directly linked to international oil prices, they are generally linked. although domestic refined oil prices are relatively resistant to declines due to the calculation formula of the national development and reform commission, if international oil prices fall by 10%, the average domestic import price will fall by 8%, and refined oil prices can fall by at least 5%. in short, the decline in international oil prices will push domestic refined oil prices down slightly, which will not only reduce the costs of oil refining companies, but also reduce the costs of transportation companies and oil truck owners.

third, it may deepen domestic deflationary pressure.

as household purchasing power lags seriously behind investment in supply and domestic oversupply is more significant due to weak demand, ex-factory prices of industrial products and consumer prices excluding food have both fallen significantly. the gdp price contraction coefficient, which measures comprehensive deflation, has continued to fall for five quarters.

the sharp drop in international oil prices will lead to discounts in china, but it will eventually drive down domestic refined oil prices, which will continue to drive down production costs and transportation costs, freeing up some space for industrial and consumer prices to continue to fall. what china urgently needs now is to reverse the deflationary trend, not to help prices fall.

【author: xu sanlang】