The US is the largest oil producer in the world. Back in 2020 as oil prices nosed-dived, US producers stopped producing causing a relative shortage of oil throughout the globe. As prices have climbed, the US is back cranking out the stuff. More supply means downward price pressure.
Oh, then there's that China thing. China is the world's largest user of oil. In case you haven't noticed their economy is getting it's ass kicked. That means less demand for global oil which also depresses oil prices.
How long this goes on? Anybody's guess.
Can Lower Gas Prices Last?
Energy traders hope OPEC will prop up a slumping oil market
By David Uberti, WSJ
Nov. 13, 2023
A selloff that dragged crude prices near their lowest levels in four months has left many oil drillers, energy traders and fuel producers with the same question: What will OPEC do?
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Benchmark U.S. crude has posted three weekly losses in a row, tumbling as much as 20% below its September high, before stabilizing Friday at $77.17 a barrel. Still, the market is flashing signals that suggest some traders are betting the declines will continue.
The downdraft of recent weeks has taken pressure off the Federal Reserve’s inflation fight by promising that prices at the pump will keep dropping, extending weeks of declines at gas stations from San Diego to Phoenix to Salt Lake City. Ingredients for many plastics and industrial chemicals should also become cheaper, while prices for heating oil and power-generating diesel in the Northeast could drop just before winter begins.
The market’s retreat has come despite slimmed-down production quotas this year by the Saudi-led Organization of the Petroleum Exporting Countries and its Russia-led allies. Lower prices mean smaller war chests for the oil-reliant governments in Riyadh and Moscow, which have elected to cut additional shipments through December in a bid to prop up the market.
That support has proven shaky. A manufacturing slowdown has dinged some fuel-hungry industries in Europe and the U.S., while an uncertain economic outlook in China and strong U.S. dollar have dented demand growth in Southeast Asia. On Wall Street, analysts are also increasingly pointing to gushers of supplies that have kept storage tanks around the world filled higher than anticipated.
“All those factors are leading people to believe that we need a signal from OPEC on the expected volume on their end,” said Francisco Blanch, head of global commodities and derivatives at Bank of America. “Clearly, the market doesn’t need more oil at the moment.”
Oil’s slide has weighed down stocks of oil producers, major refiners and pipeline operators. Chevron shares have skidded 14% over the past month, while Exxon Mobil has slipped about 6%, leaving both firms in the red over the past year.
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In October 2022, the 23-member group known as OPEC+ cut output by the largest amount since the start of the pandemic. The move angered Washington, sparking fears of an inflationary shock, and helped oil producers and their shareholders continue raking in cash.
But projections by major trading houses and Wall Street banks that the move would lead to a prolonged run-up in prices haven’t borne out yet. Saudi officials, who can turn their country’s production levels up and down like a spigot, have instead credited recent price drops in part to short sellers betting against the market.
Money managers such as hedge funds have indeed piled into more of those positions in recent weeks, according to federal data. That helped make contracts for December U.S. crude shipments cheaper than those for January at certain points last week, threatening speculators with losses when they unload those holdings to avoid taking delivery of the cargoes.
Hedge funds could stay out of the market and avoid that risk should the dynamic become more pronounced. Computer-trading algorithms that buy and sell commodities based on trends could follow their lead, adding momentum to any resulting price move.
But many analysts and some energy executives are also pointing to real-world factors pushing oil prices downward.
America is pumping more oil than ever, thanks to the continued growth of shale producers scattered across the Permian Basin in West Texas and New Mexico. Brazilian officials have recently reported record crude output of their own, while rigs off the coast of Guyana have begun tapping the country’s prodigious reserves in earnest.
More sanctioned oil is also seeping back into the market. Russian exports, many of which face a U.S.-backed price cap, exceeded the country’s target by about 400,000 barrels a day in October, according to Rystad Energy. Ship-tracking analysts in recent months have also reported a surge in Iranian deliveries to refiners concentrated in northeast China.
Washington has yet to increase sanctions enforcement on those oil flows, despite Israel’s war against Hamas, which is backed by Iran. “So far this year, there have not been supply disruptions,” UBS analyst Giovanni Staunovo said.
OPEC+ agrees to production cut
Demand growth has also proven weaker than some traders anticipated. In the U.S., federal forecasters estimate that Americans next year will guzzle less gasoline per capita than they have in two decades. Diesel consumption, meanwhile, has dropped after the end of the pandemic-era home-delivery boom left many truckers logging fewer miles on the road.
“We’re on the other side of that, where things are returning to a little more normal,” said Eric Slifka, chief executive of Global Partners, which operates fuel stations and storage tanks across the country.
OPEC’s meeting later this month could help reassure jittery traders that the market won’t be oversupplied next year despite its bearish signals. But some investors are skeptical that the Saudi-led group’s members, which rely on oil revenues to fund everything from militaries to public works, will opt for even deeper production cuts.
“We are maintaining an opinion that the Saudis are almost powerless in further supporting this market,” the trading firm Ritterbusch & Associates told clients Friday.
Write to David Uberti at david.uberti@wsj.com
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