Oil Under Pressure From OPEC and API

The US crude price (CL) fell to a 5-month low on Tuesday, December 5, due to uncertainty surrounding OPEC's voluntary production cuts and an increase in API crude and product builds. Nonetheless, prices did experience a spike during the session after Russia suggested more OPEC cuts could impact the market in 2024, but it was only brief.

In addition, growing concerns over waning demand and record-breaking US oil production may have contributed to the fall in prices. As a result, the commodity settled 1% lower at $72.32 a barrel, while Brent oil (EB) fell 1.1% to settle at $77.20.

Key Factors Driving the Fall

Oil prices were driven lower partly by doubts around OPEC+ supply cuts announced last week and concerns over weak demand. 

In fact, OPEC+'s inability to enforce its recommended production cuts to its members is one of the main reasons behind the price drop. Even some analysts see the supply cuts as unlikely to support prices. Some traders were also sceptical that the cartel would not follow through on its pledged cuts of 2.2 million barrels per day as the cuts were seen as voluntary and not mandatory. (Source: Market Watch)

With US crude exports nearing a record 6 million barrels per day and API's inventory rising, indicating a healthy supply, oil prices fell for the fourth session in a row. On that end, US oil production hit a record high of 13.24 million barrels per day in September 2023, and US oil inventories rose by 594K barrels for the week ending December, in contrast with analysts' expectations. The stock build and lower oil prices were also attributed to OPEC+'s decision to maintain cuts of 1.5 million barrels per day into 2023. 

Potential Support from OPEC's Readiness

Following scepticism around OPEC+'s ability to deliver the promised reductions, Russia's Deputy Prime Minister Alexander Novak warned that the cartel could deliver more cuts through the first quarter of next year. This, as a result, caused a spike in oil prices on Tuesday, albeit it was only brief. Interestingly, previous cuts from Russia and Saudi Arabia briefly sent oil prices to a 10-month high in September.

Moreover, on Monday, Saudi Arabia's energy minister, Prince Abdulaziz bin Salman, said that cuts could continue past the first quarter if needed. However, the market was unconvinced without more clarity and reassurance from OPEC+. His US counterpart, Deputy Energy Secretary David Turk, said the US was refilling its Strategic Petroleum Reserve (SPR) as much as possible at current prices in a Monday televised appearance, which can be another positive catalyst for oil prices.

Another factor that would otherwise pressure WTI prices is Brazil, which was the latest OPEC addition,  not participating in production cuts for now.

What to Monitor Going Forward

Some note that the current market situation resembles the 2014-2016 period when Saudi Arabia filled the market with oil to crash oil prices and hurt US shale producers. However, it is important to keep in mind the fact that US shale companies have become more resilient and focused on longevity over growth, with US output at record levels still affecting OPEC in the long run. 

Additionally, it seems that US shale drillers have no plans to slow production for now despite cost inflation and lower oil prices internationally. 

This leaves Saudi Arabia with two options: The first may be to boost production again to target US shale and the second may be to continue with production cuts.  

Besides this, China, the world's largest oil importer, could reduce its oil imports if its economy and business activity continue to deteriorate. Moody's downgraded China's credit outlook only Tuesday, which was seen impacting market sentiment in the short term, increasing calls for stimulus by the PBOC.

Adding to this, Changqing Oilfield, a branch of PetroChina, has discovered a large-scale oilfield with geological reserves of over 100 million tonnes in Huanxian County of Gansu Province. The new oilfield's daily crude oil output has reached 504 tonnes and has formed a crude oil production capacity of 500,000 tonnes per year.

Wrap Up

The oil market may currently be in a state of flux, with prices influenced by multiple factors. While there is potential support from OPEC's willingness to deepen output cuts, uncertainty remains due to demand worries, surprising stock reports, and record-breaking US oil production. 

The future of oil prices may largely depend on how these factors play out, with investors having to follow all factors to navigate volatility.