This week has seen a drastic drop in oil prices, which may significantly impact the future plans of OPEC+ (the Organization of the Petroleum Exporting Countries and its allies). Originally, OPEC+ had scheduled an increase in oil supply starting in October. Their plan was to boost production by 180,000 barrels initially, with intentions to ramp up the supply gradually over time. However, recent developments in the oil market have led members of the alliance to reconsider this strategy.
The decline in crude oil prices and the economies reaction aligns with the fundamental economic theory of the Law of Supply: a decrease in the price of a good or service will result in a decrease in the quantity supplied. As prices for crude oil have dropped substantially, supplying more oil at this stage could be detrimental to suppliers. With the market currently unprepared to absorb additional barrels, this potential increase in supply could lead to a loss in profits for oil producers.
Two benchmarks for crude oil, Brent and West Texas Intermediate (WTI), “have fallen by roughly 5% this week so far” (Hirtenstein 2024). This decline is notable, with oil prices hitting their lowest point since December 2023 on Tuesday of this week. The drop has been largely driven by reduced demand in major economies, compounded by warnings from Goldman Sachs about diminishing Chinese commodity demand. Additionally, low Chinese manufacturing activity has further pressured oil prices. Currently, a barrel of oil is priced at $70.34, marking the lowest rate of the year.
In light of these developments, OPEC’s consideration to increase production this year seems increasingly impractical. To prevent further declines in oil prices, reducing production might be necessary. If we don’t see these production cuts soon “the average price of oil could fall to $60 per barrel in 2025” (Gupta 2024).
Looking ahead, there are emerging factors that could influence the oil market. Goldman Sachs has observed that advancements in artificial intelligence could impact oil prices over the next decade. Specifically, generative AI has the potential to lower production costs and enhance the recovery of resources, which could increase supply levels.
Additionally, there have been recent disruptions to Libya’s oil exports. While these disruptions have added to the volatility, the primary concern remains the overall falling demands. As OPEC+ navigates these challenges, the future of oil prices and production remains uncertain, influenced by both immediate market conditions and long-term technological advancements.
Sources
Gupta, L. (2024, September 5). Citi Says Oil Prices Could Plunge Below $60 Amid Market Uncertainty. MSN. https://www.msn.com/en-us/money/markets/citi-says-oil-prices-could-plunge-below-60-amid-market-uncertainty/ar-AA1q4dCm?ocid=BingNewsSerp
Hirtenstein, A. (2024, September 3). Oil and copper prices slide after Goldman warns on Chinese demand. The Wall Street Journal. https://www.wsj.com/livecoverage/stock-market-today-dow-sp500-nasdaq-live-09-03-2024/card/oil-copper-prices-decline-on-concerns-over-chinese-demand-i4s9CJGplA15EKTEI4dp
Hirtenstein, A. (2024b, September 4). Oil price drop casts doubt on OPEC’s Great unwind. The Wall Street Journal. https://www.wsj.com/livecoverage/stock-market-today-dow-sp500-nasdaq-live-09-04-2024/card/oil-price-drop-casts-doubt-on-opec-s-great-unwind-tkKNmvyuUOHqxnyOJvui
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