Oil plunges into a downward spiral despite pressure from OPEC+

Update Post: November 28, 2023 11:29 pm

Oil is experiencing its fifth consecutive week of losses after plunging into a bear market with a drop from highs to lows approaching 20%, due to signs indicating abundant supply and the increase in strategic reserves, factors that counteracted Attempts by OPEC+ leaders led by Saudi Arabia and Russia to contain price declines.

However, the prices of a barrel of Brent oil, a reference in Europe, and West Texas Intermediate (WTI) crude oil, in the US, registered a 4% rise last Friday, reaching above 80 and 75 dollars, respectively. However, the daily spike at the weekly close does not hide a downward trend with four consecutive weeks of decline.

On Thursday, West Texas (WTI) traded near $73 per barrel last Thursday, November 16, after having fallen more than 20% from its peak in September at $91.2. Meanwhile, the global benchmark Brent plummeted almost 5% on Thursday, to $77, its lowest since July that contrasts with the near $96 it reached in November.

The price declines followed an increase in crude stockpiles in the United States and were likely exacerbated by automated selling programs by hedge funds and ETFs operating in this market. The producing countries have denounced speculative movements by investors that they hope to stop with new messages regarding production cuts.

The four-week streak of losses in the price of crude oil, the longest since May, has occurred despite pressure from the Organization of the Petroleum Exporting Countries (OPEC+) and its allies. In addition, losses have also been driven by a declining risk premium for the conflict between Israel and Hamas, as fears that the conflict will widen and disrupt oil supplies have so far failed to materialize.

The International Energy Agency (IEA) said earlier this week that growth in production means the global market will not be as tight as expected this quarter, adding pressure on OPEC+ ahead of a meeting on its oil policy. supply on November 26.

“We believe OPEC will ensure that Brent oil prices end up in the 80 to 100 range in 2024 by ensuring modest deficit pricing,” said Goldman Sachs analysts led by Daan Struyven. According to their analysis, the latest drop in prices was driven by non-OPEC supply that exceeded expectations.

The overproduction above the quotas assigned by the cartel emerges the lack of trust between the producing countries and the need for powers like Russia to increase their income while maintaining extraordinary spending in the Ukrainian war, which is on its way to completing two years. left since the invasion.

Contango and backwardation effects

Other major products such as Nigeria seek to anticipate the return to the front line of the oil scene in Venezuela, which has the largest reserves in the world and has reached an agreement with the US to lift the sanctions that weigh on the country in exchange for calling free elections. . in the country in 2024.

Midweek data showed national U.S. crude stocks rose for a fourth week, reaching the highest level since August. Part of that increase came at the key point in Cushing, Oklahoma, where stocks expanded more than 8%.

There have also been some concerns on the demand horizon. Figures from China, the world’s biggest crude oil importer, show refiners reduced daily processing rates in October as apparent demand for oil declined from the previous month. The decline in inflation and the weaker employment data in the US

“The series of weak macroeconomic data, coupled with rising US crude stocks, triggered the sell-off in oil,” said Han Zhong Liang, investment strategist at Standard Chartered Plc. The expert added that WTI prices will likely be slow due to the slowdown in the global economy.

Price patterns along the futures curve indicate looser conditions. The difference between the two closest Brent contracts was 12 cents a barrel in contango, where short-term prices are below longer-term ones.

This phenomenon occurs for various reasons, such as higher storage costs, loan interest on the purchase of crude oil, expectations of increased demand or future oil shortages.

This compares to more than $1 per barrel in forwardation (a situation contrary to contango) a month ago. It is a less common phenomenon and often indicates immediate shortages or current high demand for the asset. In this situation, buyers pay more for the barrel in the present than in the future.

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November 20, 2023 5:38 am