Despite the OPEC+ group’s recent decision to extend their production cut, weakness continued in global oil markets on faltering demand from China and swelling American supplies. Escalating geopolitical tension also added pressure on the demand outlook of the commodity.
Oil has been trading in a tight range since the second half of 2022. It was broadly congested inside $97-$65 per barrel on worries that supplies will exceed demand.
To limit the excess supplies and stabilise prices, the OPEC+ group in April 2023 decided to cut production and has since continued to extend these cuts. Earlier, OPEC + announced a gradual increase in production by around 2% of global supply in October, but in the latest meeting they delayed it until January 2025.
OPEC+ production policies usually have a significant impact on global oil markets. When OPEC+ members decide to cut production, it typically leads to higher oil prices, while increasing production tends to lower prices as the group holds a substantial share of global oil production and exports.
OPEC+ is a group of countries that meets regularly to decide how much oil to sell on the global market. When the producers’ cartel cuts supply in response to falling demand, oil prices tend to rise. However, over time, prices will revert back to a level that’s usually lower, unless demand adjusts or supply is meaningfully cut.
Lower demand from China growth is weighing prices considerably. China’s role in global oil markets is significant because it is the world’s second-largest consumer of oil and the largest importer. China’s oil demand has been declining in the past several months. This year, the country’s oil demand growth is expected to be around 180000 bpd from the average growth of one million bpd in the previous years. This was due to factors like economic slowdown, shift to electric vehicles and expansion of high-speed rail networks. Output from the US and other non-OPEC countries like Canada and Brazil has been rising, which is helping to balance the global oil market, limiting the price rise. US production is running near all-time highs. In August, US oil production rose to a monthly record of 13.4 million barrels per day.
The United States has been producing more crude oil than any other country for the past six years. In 2023, the US averaged 12.9 million barrels of crude oil per day, which was a record for the country and the world.
Rising geopolitical tensions are also affecting the demand prospects. The ongoing Russia-Ukraine war and conflicts in Middle East could perhaps further weaken global growth that could lead to feeble demand for oil.
The ongoing Middle East conflict continues to be worrisome for global oil markets. Any damage to the critical oil infrastructure in this region may disrupt oil production that may lead to a price rise. However, the extent of price fluctuations depends on the severity of the conflict and the response of major oil producers to manage supply levels.
Since the supply-demand dynamics remain balanced, prices continue to be steady. Meanwhile, a volatile US dollar, efforts taken by the Chinese government to boost their economy, easing geopolitical conflicts, and changes in production policies of key producers would influence prices in the coming days.
(The author is Head of Commodities, Geojit Financial Services)