Exploring the Dip in Oil Prices​

By Jake Rickman​

What do you need to know this week?

After hitting 14-year highs, oil prices have dropped down to $115 per barrel.

There are two primary reasons the price of oil has retreated:

First, China imposed another series of aggressive lockdowns across several provinces, including Shanghai, one of the PRC’s most important financial centres; and

Second, there are signs that talks between Russia and Ukraine may be progressing.

That said, the price of oil remains 80% higher than this time last year.

Why is this important for your interviews?

Exploring how these two factors might influence oil prices is a good way to build your commercial acumen.

China is a prodigious consumer of oil and natural gas. In fact, they are the largest importer of oil in the world. The fact that they are aggressively enforcing their “zero-COVID” strategy by imposing lockdowns of the same magnitude we saw at the beginning of the pandemic necessarily means that there will be decreased economic activity in mainland China.

Stifled demand means fewer people will be paying for gas to power their cars. Likewise, manufacturers that rely on oil to produce goods like plastics and chemicals will at the very least have to contend with lower demand for their products; but the lockdowns may also disrupt production as workers are forced to stay home.

On the other hand, the market is hopeful that the negotiations between Ukraine and Russia will lead to peace in the region. Should this normalise the supply of oil and gas to the rest of Europe — more supply = lower prices because, assuming demand stays the same, there will be more oil and gas available.

How is this topic relevant to law firms?

It is not always clear how a given issue will impact a client down the line; no one has a crystal ball. However, clients expect their lawyers to consider the wider economic forces at play and consider how they might influence the outcome. This is ultimately what commercial awareness often means in practice: being aware of what is going on and then applying your analytical skills to evaluate its possible effects.

In terms of growing your commercial awareness as a future trainee, it may be helpful to start by disentangling all the different economic, political, and market forces at play, and then trying to construct simple relationships between them through a chain of cause and effect: if China locks down again, at least one effect is that the demand for goods (including oil) will decrease, which (given China’s stature as an oil importer) is why the market is discounting prices.

Of course, something could happen tomorrow that might change this — the peace talks might fall through.

But provided you’re checking in with the news regularly (i.e., once a week through this newsletter), you will be able to situate tomorrow’s development in your mental model.