These are, for sure, tough times for the oil market.
Just weeks ago, Brent crude was on the cusp of finally fulfilling industry forecasts of a return to $100 a barrel as record fuel demand and Saudi Arabia’s supply cuts depleted global oil inventories.
The eruption of conflict in the Middle East shortly after heightened the risk of a price spike.
But on November 8 the benchmark retreated to a three-month low under $80 a barrel. Concerns about supply are giving way to doubts about plunging refinery profits in China and Europe, lacklustre physical cargo trading and an uncertain economic outlook for the US.
The situation is a sharp reversal from late September, when Brent rallied above $97 a barrel and the Opec alliance projected an unprecedented decline in oil inventories amid record fuel demand and extra production cuts by Saudi Arabia.
Oil prices rose on Monday after Opec’s monthly market report eased market concerns about waning demand in the United States and China. Prices steadied yesterday as the International Energy Agency indicated the market isn’t as tight as previously expected, even as demand continues to climb.
But investors had been worried after the US Energy Information Administration (EIA) has said the country’s crude oil production this year will rise by slightly less than previously expected and that demand will fall.
Weak economic data last week from China, the world’s biggest crude oil importer, also raised fears of faltering demand. Chinese refiners asked for less supply for December from Saudi Arabia, the world’s largest exporter.
Falling oil prices may spell relief for big consuming nations like the US, where gasoline prices near $4 a gallon have squeezed households and threatened to become a political liability for President Joe Biden.
And it could offer respite for central banks such as the Federal Reserve, as it seeks to wrap up a spell of prolonged monetary tightening.
On the other hand, oil’s retreat is a particular setback for Saudi Arabia, which leads a coalition between the Organisation of Petroleum Exporting Countries and other major crude producers including Russia.
Next year, oil supplies from the US, Brazil and Guyana are also projected to swell.
Many traders have said they were having to discount cargoes due to weaker demand from refineries, which face a slide in the profits for making fuels like gasoline and high shipping costs.
European consumption of diesel and naphtha — fuels that power trucks, trains, ships and construction — has plunged.
Goldman Sachs Group, which had led Wall Street’s calls for the return of $100 crude, said in a report last month that the acute inventory declines anticipated by the industry had yet to materialise.
Next year, US gasoline demand per capita will plunge to the lowest in two decades, just as production climbs to a record above 13mn barrels a day, according to the EIA.
Oil’s see-saw trajectory is a double-edged sword.
Major oil producing countries will lose money regardless of the market share they enjoy. The Gulf countries produce oil at the lowest cost; but due to high government spending, they need higher prices to balance their budgets.
But big importing nations such as China, India and Germany could get some relief from falling energy bills.
But cheap oil can cut investments to develop new oil and gas fields.
Matter-of-factly, few analysts would realistically expect oil prices to return to the sustainable $100-plus levels in the long-term. But oil companies say global energy future envisages rising demand and population growth, making oil an important fuel for decades to come.
The world is in need of a stable oil market with price equilibrium.