(David Zalubowski/AP)
US oil futures notched their seventh straight week of declines on Friday, marking their longest losing streak in five years.
The prolonged drop comes as analysts worry about increased production around the globe and shrug off the Organization of the Petroleum Exporting Countries' promises to limit supply. (OPEC+, which includes Russia and other OPEC allies, agreed to cut oil output by 2.2 million barrels per day through the first quarter of 2024, but markets don't think all members will adhere to that).
Markets are also fretting over a projected decline in demand for crude, especially in China, where there are ongoing signs of a weakening economy. Chinese consumer prices are falling at their fastest rate since the depths of the pandemic in late 2020.
US gas prices, meanwhile, have dropped to an average of about $3.19 per gallon. That's down about 22 cents from a month ago and 14 cents from a year ago.
Before the Bell spoke with Jim Mitchell and Corey Stewart, Americas oil analysts at LSEG, to better understand the dynamics pushing down the price of oil.
This interview has been edited for length and clarity.
Before the Bell: Oil futures have been steadily decreasing for seven weeks. Is that significant, historically speaking?
Jim Mitchell: Yes and no. Certainly markets are gonna fluctuate, the oil market is ginormous — the largest of the commodity markets. But oil also acts as a currency. It funds a lot of a lot of countries' entire GDP.
Corey Stewart: You've seen where we were maybe a bit undersupplied on the crude oil for a while, supporting higher prices. And as we moved out of the traditional driving season when we'd see more crude runs, it was only natural for prices to come down a little bit. A fall towards the end of the year is not necessarily surprising, as we move probably from an undersupply to a slight oversupply in the crude oil market here in the near term. It looks dramatic, and it is, but I think you can see how this will play out based on seasonality.
Let's talk about supply. It seems as though the tide has shifted on expectations that OPEC+ will deliver on production cuts.
Mitchell: Prices were creeping past $90 a barrel just a few months ago, and so there was a lot of incentive for other countries, including the US, to start producing more energy.
Now we're seeing record production in some parts of the US, so it's going to be more difficult for OPEC to implement some of the tactics that it's used before to limit supply and bring prices back up. It's not going to work.
There are other issues. OPEC is not talking about Libya, for example. Libya doesn't have a quota and is now producing about 1.1 million barrels of oil per day. Iran is producing 3.2 million, and the oil minister said he wants to get to 3.6 million by the end of the first quarter next year. So they're ramping up and at the same time, Saudi Arabia is still making cuts.
When you discuss all that's going on geopolitically and the shifting centers of crude production, does it feel like we're approaching a significant power shift in the market?
Mitchell: I've been in this industry a long time and every day is pivotal, sometimes the general public is aware of it, sometimes it's not.
Considering where we are worldwide, in terms of GDP and some cracks in the world economy, this is a pivotal moment.
But are we going to have an issue in the winter? I don't think so. Even if Europe gets cold, I don't think we'll see the same scare as we did last year.
Stewart: Diesel inventories in Europe were exceeding lows last year, and they're well above that now. They're adequately supplied. Winter is shaping up to be relatively mild so they're better positioned.
US production is also in better hands than it was four or five years ago. Companies can weather the storm a bit more, all of these companies have worked to repair their balance sheets versus working with a 'drill baby drill' mentality like they were for a long time. So the influence of OPEC is still there, but it's a little bit less on this side of the world.
Should we be worried about weakening crude demand in China?
Mitchell: In the last two years, it's been difficult to get information out of China.
We are about as big of a data company as it gets: we have an office in Singapore; we have oil and product analysts in China and other Southeast Asian countries; and even with that, it's difficult to get demand information out of China.
But there's a couple of things that are interesting. China's refining capacity keeps creeping up, it's somewhere in the neighborhood of 15.5 million barrels a day. The US is around 17.7 million, and China is likely to surpass the US in the next few years.
There are quotas, the Chinese government will contain how much the Chinese refining industry can produce so it doesn't get ridiculous, because it certainly could. Those quotas contain the industry a little bit, but still create possibilities where China is selling gasoline into the Pacific products market. And when they do that in size, it impacts the margin of refineries in Southeast Asia. You can also see an impact in the US.
The easy thing to assume when you see China dumping products into the Pacific products market is to think that their demand is decreasing, but that's not necessarily true. That's where the tricky part comes with China. We're kin to the fact that they are having some pretty significant credit risk. There may be a lack of demand in China but it's really hard to tell how much.
Stewart: You do have to wonder when China starts shipping out a lot of gasoline. It used to be the policy there that China wanted to keep everything domestic. But we've been seeing more and more exports and that does affect prices.
In the near term, as far as the demand for crude oil markets, it's been a little different. Last month imports fell by about 10% from the month prior, and there's been a year-over-year drop of 9.3%. You're seeing crude oil demand into China going down.
Do you see oil prices remaining low in 2024?
Stewart: I do see the first part of the year starting out a little lower. If we see a weakening economy, it will impact demand and send prices lower. But by and large, if you just look at history we have seen petroleum demand growth nearly every single year.
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