Causes “headache” and intense reflection OPEC the continuous decline in their prices oilputting on hold plans to increase supply from October.
The reason is the significant drop in oil prices to the lowest level since January 2024 and erased all the increases accumulated since the beginning of the year.
Brent fell to $73.24 a barrel today and U.S. 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+, which is already down 18% from last year’s highs in April.
Two items
In recent days, two factors have put downward pressure on crude oil prices and have convinced OPEC+ that increasing supply is not a good idea at this time: China continues to struggle economically, but there are also clear signs of economic weakness in the US, with industrial activity declining for the fifth consecutive month. Investors are even seeing the possibility that the slowdown in growth may be stronger than expected.
In China, industrial activity data pointed to another month of contraction – the fourth in a row – while housing prices continued to fall due to weak demand in the country.
Reuters even published a first estimate based on surveys of OPEC production in August, which revealed that the cartel members produced 2.6 million barrels per day. This is 340,000 barrels less than in July. A decisive factor was the significant reduction in production in Libya by 290,000 barrels per day, as Barbara Lambrecht, an analyst at Commerzbank, writes in the latest issue of “Rawstoffe Aktuell”.
Three unstable factors
In September, however, OPEC production could fall even further: on the one hand, if oil production in Libya is reduced for a longer period – on August 28 it was below 600,000 barrels per day.
Discussions at OPEC have heated up as three factors cannot be predicted:
- First, how long will the production losses in Libya last, given that the UN is already trying to mediate between the conflicting parties.
- Second, whether Iraq and Kazakhstan will actually compensate for overproduction from September onwards and proceed to reduce supply.
- Third, whether global oil demand will indeed increase as sharply 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, China’s recently moderate oil imports have caused scepticism: “The weakness of the 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 to see what OPEC+ will finally decide, as its supply reduction strategy has simply reduced the profits of member countries. What seems clear is that oil oversupply is guaranteed for the coming quarters.