Oil prices are at their lowest levels in five months, as investors become increasingly skeptical that the production cuts announced last week by Opec+ will be sufficient to offset rising supplies from outside of the cartel.
Brent, the benchmark for international crude , dropped 3.8 percent to $74.30 per barrel on Wednesday. This is the lowest price since the end June. West Texas Intermediate (the US benchmark) fell 4.1 percent to $69.38 per barrel.
Global crude oil prices have fallen for five days in a row, even though Saudi Arabia extended its voluntary reductions and Russia led OPEC+ last week.Other members also added new cuts to the mix in an effort to boost the market.
Many traders are not convinced by the voluntary nature, as the cuts fall outside of the normal quotas set by the group.
Martijn Rats is the chief commodities strategist for Morgan Stanley. He said that “the market has begun to price in” the possibility of Opec no longer remaining cohesive and not implementing these cuts.
Lower oil prices help boost the global economy, which has been affected by a slowdown in China and high interest rates in major industrial nations.US President Joe Biden is likely to welcome the cartel’s inability to increase the market. He is currently facing low approval ratings, and has made reducing gas prices and controlling inflation a key plank for his reelection campaign next year.
The oil industry will not be happy to see the prices continue to fall. The Russian President Vladimir Putin visited the United Arab Emirates on Wednesday, an Opec-member country that has been a vital conduit for Russian trade ever since the invasion in Ukraine.
Putin continued to Saudi Arabia on Wednesday. His relationship with Crown Princess Mohammed Bin Salman, who is the de facto ruler of the Kingdom, was based on the Opec+ partnership they formed in 2016.
Analysts say investors are not convinced that Opec, which includes members who fear losing market share, is united in its desire to limit supply. They point out that the majority of cuts are extensions of existing plans.
African members of this group, including Angola, have refused to further reduce their output.
Morgan Stanley’s Rats said, “Opec risks losing market share when they cut production this way.” “A number of Opec nations are eager to maximize their resources.”
US gasoline stocks increased more than anticipated, leading to further price drops on Wednesday and raising concerns about weak demand.
Bjarne Shieldrop is the chief commodities analyst for SEB. He said that if prices do not recover, he expects more production cuts by Opec+.
He said, “There was a strong growth in oil production from the US this year – stronger than expected.” If this trend continues into the next year, it will be a challenge for Opec+. I expect to hear more announcements.”