What is behind oil price’s recent decline?
Published: 08:05 PM,May 03,2024 | EDITED : 12:05 AM,May 04,2024
Mohamed Hashad, Chief Market Strategist, Noor Capital
Since mid-April 2024, the global oil market has been in a tug of war mode, with remarkable fluctuations, as prices continued to swing and reacted to upward and downward pressures. To understand this volatility, it is essential to refer to reliable data and stay informed on global developments and the key factors that directly or indirectly impact oil prices. Supply and demand for oil, in turn, affect price movements. In this report, let’s try to delve into the main factors behind these fluctuations and the current decline in oil prices.
Downward pressures:
Oil touched its lowest levels in seven weeks, on Wednesday, to close with a decline of more than 3%, as Brent crude futures for July delivery declined by $2.89, or 3.4%, from the closing level of July contracts recorded on the previous trading day, Tuesday, for Brent crude to eventually settle at $83.24 per barrel, meaning that we are facing the largest daily percentage decline since October 2023.
West Texas Intermediate crude, US oil, fell $2.93, or 3.6%, with the settlement price set at $79.00 per barrel. These were the lowest closing levels for both benchmarks since March 12, and these levels left both Brent and WTI in the oversold zone technically for the first time since December. 2023.
Just hours before the time of writing this report, the US Federal Reserve kept interest rates unchanged and indicated that it was still inclined towards eventual reductions in borrowing costs, but it put a red flag on the recently announced inflation figures, which were disappointing.
The US central bank’s latest monetary policy statement indicated,, Wednesday that “inflation has declined,” but any delay in lowering interest rates could lead to a slowdown in economic growth and consequently a reduction in demand for oil, which renews questions about whether what is happening in the United States is an economic slowdown or a soft landing.
Supply chain surprises:
In contrast to April 2023, the voluntary OPEC+ oil output cuts in April 2024 were offset by increased oil output from the Americas, especially the United States (and data from the US Energy Information Administration’s April 2024 drilling productivity report revealed a significant increase in active drilling rigs compared to April 2023. Brazil, in South America, also contributed to the increase in supply), additionally, Iran’s return to the market added more to the supply side in April 2024, in addition to recent statements from Libya indicating that the country, in North Africa, plans to increase its oil output of oil to two million barrels per day, and investments amounting to $17 billion have already been allocated to achieve this.
Tensions in the Red Sea region, like April 2023, continue to contribute to higher tanker freight rates, and many other services, including insurance services, in April 2024. However, the impact on crude oil prices themselves remained minimal, reflecting the subdued effect observed during the last month.
The geopolitical risk premium, while not a major factor in April 2024, continues as tensions in the Middle East always carry the risk of supply disruptions and any major escalation could send prices higher, but the hostage talks and Gaza ceasefire negotiations have helped mitigate those risks which could have affected the Middle East, one of the most important oil supply regions worldwide.
To a large extent, oil markets are ignoring the repercussions of the tensions in Gaza and the Middle East, after the fears related to those tensions seemed exaggerated, as oil prices stabilized at $87 per barrel, about 3 days ago, which is the same level before the intensity of the conflict increased over the past weeks.
Shale oil output:
US shale oil output has been a major source of new supply in recent years. Continued growth or decline in this sector could affect global oil prices, and the White House has pledged that gasoline prices will remain affordable for everyone as the summer approaches.
We believe that the calmness of crude oil prices in the face of geopolitical turmoil is due – relatively speaking – to what happened more than 7,000 miles away from the Middle East. That is, in the shale oil fields in both the West Texas and North Dakota, as drilling rigs leave global markets flooded with shale oil, which – without a doubt – draws the global oil map of its own in a way that investors must understand, and may even affect the balance of supply and demand.
The Energy Information Administration announced that US commercial crude oil inventories rose by 7.3 million barrels to 461 million barrels total last week ending April 26, the highest inventory levels since June 2023. The rate at which refineries process crude oil into gasoline and other products fell to 87.5%, significantly, by less than 90.7% in the same period last year.
The operating rate of refineries decreased as demand for gasoline fell to less than 9 million barrels per day for four weeks. The average daily demand for gasoline reached 8.5 million barrels per day last week, a decrease of 1.3% from the same period last year.
Downward pressures:
Oil touched its lowest levels in seven weeks, on Wednesday, to close with a decline of more than 3%, as Brent crude futures for July delivery declined by $2.89, or 3.4%, from the closing level of July contracts recorded on the previous trading day, Tuesday, for Brent crude to eventually settle at $83.24 per barrel, meaning that we are facing the largest daily percentage decline since October 2023.
West Texas Intermediate crude, US oil, fell $2.93, or 3.6%, with the settlement price set at $79.00 per barrel. These were the lowest closing levels for both benchmarks since March 12, and these levels left both Brent and WTI in the oversold zone technically for the first time since December. 2023.
Just hours before the time of writing this report, the US Federal Reserve kept interest rates unchanged and indicated that it was still inclined towards eventual reductions in borrowing costs, but it put a red flag on the recently announced inflation figures, which were disappointing.
The US central bank’s latest monetary policy statement indicated,, Wednesday that “inflation has declined,” but any delay in lowering interest rates could lead to a slowdown in economic growth and consequently a reduction in demand for oil, which renews questions about whether what is happening in the United States is an economic slowdown or a soft landing.
Supply chain surprises:
In contrast to April 2023, the voluntary OPEC+ oil output cuts in April 2024 were offset by increased oil output from the Americas, especially the United States (and data from the US Energy Information Administration’s April 2024 drilling productivity report revealed a significant increase in active drilling rigs compared to April 2023. Brazil, in South America, also contributed to the increase in supply), additionally, Iran’s return to the market added more to the supply side in April 2024, in addition to recent statements from Libya indicating that the country, in North Africa, plans to increase its oil output of oil to two million barrels per day, and investments amounting to $17 billion have already been allocated to achieve this.
Tensions in the Red Sea region, like April 2023, continue to contribute to higher tanker freight rates, and many other services, including insurance services, in April 2024. However, the impact on crude oil prices themselves remained minimal, reflecting the subdued effect observed during the last month.
The geopolitical risk premium, while not a major factor in April 2024, continues as tensions in the Middle East always carry the risk of supply disruptions and any major escalation could send prices higher, but the hostage talks and Gaza ceasefire negotiations have helped mitigate those risks which could have affected the Middle East, one of the most important oil supply regions worldwide.
To a large extent, oil markets are ignoring the repercussions of the tensions in Gaza and the Middle East, after the fears related to those tensions seemed exaggerated, as oil prices stabilized at $87 per barrel, about 3 days ago, which is the same level before the intensity of the conflict increased over the past weeks.
Shale oil output:
US shale oil output has been a major source of new supply in recent years. Continued growth or decline in this sector could affect global oil prices, and the White House has pledged that gasoline prices will remain affordable for everyone as the summer approaches.
We believe that the calmness of crude oil prices in the face of geopolitical turmoil is due – relatively speaking – to what happened more than 7,000 miles away from the Middle East. That is, in the shale oil fields in both the West Texas and North Dakota, as drilling rigs leave global markets flooded with shale oil, which – without a doubt – draws the global oil map of its own in a way that investors must understand, and may even affect the balance of supply and demand.
The Energy Information Administration announced that US commercial crude oil inventories rose by 7.3 million barrels to 461 million barrels total last week ending April 26, the highest inventory levels since June 2023. The rate at which refineries process crude oil into gasoline and other products fell to 87.5%, significantly, by less than 90.7% in the same period last year.
The operating rate of refineries decreased as demand for gasoline fell to less than 9 million barrels per day for four weeks. The average daily demand for gasoline reached 8.5 million barrels per day last week, a decrease of 1.3% from the same period last year.