2024-09-05 12:35:31
The continuing drop in oil prices is causing a “headache” and deep concern for OPEC, as a result of which it is putting on “ice” the plans to increase the supply from October.
The reason is the significant drop in oil prices to their lowest level since January 2024 and they have erased all the increases that had accumulated since the beginning of the year.
Brent fell to $73.24 a barrel today and US crude fell below $70 as the market took for granted the cartel’s decision to increase output by 180,000 barrels a day. The 5% drop in prices over the past two days was the final straw for OPEC+, as they have already fallen 18% from their year-highs last April.
Two items
In recent days, there have been two factors that have put downward pressure on crude oil prices and ended up convincing OPEC+ that increasing supply is not a good idea right now: China continues to have economic problems, but there are also clear signs in the US economic weakness, with manufacturing activity declining for the fifth consecutive month. Investors even see the possibility that the slowdown in growth will be stronger than they expected.
In China, industrial activity data showed another month of contraction – the fourth in a row – while house prices continued to fall due to weak demand in the country.
Reuters even published a first survey-based estimate of OPEC production in August, which found the cartel members produced 2.6 million barrels per day. A quantity that was 340,000 barrels lower than in July. A decisive factor was the significant reduction in production in Libya by 290,000 barrels per day, as Commerzbank analyst Barbara Lambrecht writes in the latest issue of “Rawstoffe Aktuell”.
Three unsettled factors
In September, however, OPEC production could fall even further: On the one hand, if oil production in Libya is curtailed for a longer period – on August 28 it was below 600,000 barrels per day.
The discussions in OPEC have caught fire, as it is not possible to predict three factors:
- First, how long will the production losses in Libya last, as the UN is already trying to mediate between the warring parties.
- Second, whether Iraq and Kazakhstan will actually compensate for the overproduction from September and proceed to reduce supply.
- Third, whether global oil demand will indeed increase as strongly in the second half of the year as the International Energy Agency had previously assumed.
The IOC in its August report assumed that in the second half of the year, global oil demand would be more than 1.5 million barrels per day higher than in the first half. In particular, recently subdued oil imports from China have caused skepticism: “Weakness in Chinese industry does not give hope for a quick recovery. There is therefore a risk that OPEC+ will face significantly lower prices,” says Lambrecht.
The market is waiting for what OPEC+ will finally decide as its strategy to reduce supply has simply reduced the profits of the member countries. What seems clear is that oil oversupply is assured for the coming quarters.