Oil Prices Set to Fall

It seems that oil is heading for a price drop. The year and a half during which OPEC+ countries attempted to maintain oil prices above $80 per barrel for Brent crude through cartel agreements has ended in failure. As the saying goes, you can’t hold back the wind – especially not three winds at once. There are three factors currently driving oil prices down. Firstly, economic problems in China, the world’s largest oil importer. Secondly, the increase in oil production by countries outside OPEC+. Thirdly, the growing momentum towards the "green transition," which aims to reduce the consumption of fossil fuels. There is also a fourth factor: Russia’s efforts to sell as much oil as possible through illegal or semi-legal means.

The latest round of falling oil prices began on 2 September, when it became clear that OPEC+ countries would announce the gradual winding down of voluntary production cuts at their pre-scheduled virtual ministerial meeting on 5 September.

While Brent crude was priced at around $80 per barrel at the end of August, by 2 September it had dropped to $77.5, and by 6 September, it had fallen to $71 per barrel. The virtual meeting of OPEC+ ministers likely added a little fuel to the fire, although much of their decision had already been anticipated.

OPEC+ Contribution

At first glance, nothing signalled trouble. In spring 2020, oil prices collapsed as the global economy came to a grinding halt due to lockdown measures aimed at combating the COVID-19 pandemic. In late April 2020, the price of Brent crude hit a catastrophic low of $20 per barrel. This was met with a stoic response – what could be done? It was a pandemic. However, the subsequent economic recovery, coupled with the injection of vast amounts of money, led to inflation running rampant, and oil prices surged to over $118 per barrel by late February 2022.

At this point, many analysts attributed the record-high oil prices to Russia’s invasion of Ukraine, which disrupted the established supply chains of Russian oil. Added to this were the first sanctions imposed on Russia as an aggressor nation.

However, in reality, not only the war in Ukraine contributed to the price of oil. Before the COVID-19 pandemic, Brent crude was priced at around $68 per barrel. After the dramatic drop in spring 2020 to $20, prices rebounded to $68 by early May 2021. From there, they rose to $95 in the lead-up to Russia’s invasion of Ukraine.

After the invasion, prices remained above $100 per barrel until early August 2022. Governments of OPEC+ countries indulged in record levels of luxury spending, and Putin was busy ordering the purchase of corrupt Western politicians, as well as fresh missiles, aircraft, and tanks – all of which would later be thrown at Ukraine. From this period of booming oil revenues, we can trace the roots of Iran’s missile programme and the ongoing conflict in Gaza. Oil dollars in autocratic regimes too often fuel war and bloodshed.

But in the second half of 2022, oil prices began to decline. Within just six months, they fell to $76 per barrel of Brent crude. Naturally, this was unsustainable. After several months of negotiations, at the next OPEC+ meeting, members agreed to voluntarily cut oil production and exports. This decision was made in two stages, with the first round of cuts announced in April and the second in November 2023. The countries involved included Saudi Arabia, Russia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria, and Oman.

The first round of production cuts was not enough to reverse the downward trend, but it did slow the fall in prices. By autumn, prices began to rise again following another decision, which was strongly backed by the two largest exporters in the cartel – Russia and Saudi Arabia.

At that point, prices exceeded $90 per barrel of Brent crude. However, by 2024, oil prices began to fluctuate, gradually declining. Now, the price has finally dropped to around $70 per barrel as OPEC+ members debate whether to end their oil-export restrictions.

The most important takeaway from the 5 September virtual meeting of OPEC+ ministers can be summed up in two points:

• Once again, we call on non-compliant countries (Iran and Kazakhstan) to return to voluntary production cuts.
• We are so tired of these self-imposed restrictions that we are ready to begin winding them down by November.

Of course, the official language was somewhat more diplomatic.

What exactly was decided at the OPEC+ meeting on 5 September?

In recognition of this strengthened resolve and renewed firm commitment, the eight participating countries have agreed to extend their additional voluntary production cuts of 2.2 million barrels per day for two months until the end of November 2024, after which these cuts will be gradually phased out on a monthly basis starting December 1, 2024, according to the attached schedule, with the flexibility to pause or reverse the adjustments as necessary. The overproducing countries also reconfirmed their commitment that the entire overproduced volume will be fully compensated for by September 2025.

It’s Not Just the Cartel at Play

It’s clear that OPEC+ is not the only player in this game. Have you heard about the reduction in production by OPEC+ members by 2.2 million barrels per day? Well, there’s another player who can shift the balance of supply and demand in the global market even more dramatically – China. According to publicly available data, China imported approximately 13 million barrels of oil and petroleum products per day in 2023, about 10% more than in 2022.

This year, it’s unclear what’s happening in China, as some peculiarities have been observed in the official statistics. But data for the first seven months, if we trust the government’s figures, show a decline of about 3% compared to 2023. It’s likely that the actual drop was even greater, and that it is continuing, due to the slowing of China’s economy.

The increase in production in Brazil, Canada and the United States is also having a significant impact. For example, at the recent Asia Pacific Petroleum Conference (APPEC), Ben Luckock, head of global oil trading at Trafigura, predicted that oil prices could fall to $60 relatively soon. It’s clear that he meant the postponement of OPEC+’s self-imposed production cuts doesn’t solve the overall problem, it only delays further price drops.

Why is this the case? Torbjörn Törnqvist, co-founder and chairman of energy trader Gunvor, shed some light on the matter: “The problem is not OPEC, as they’ve done a great job handling this... But the issue is that they don’t control where production growth is happening outside of OPEC, and that’s significant.” He added that more oil is being produced than consumed, and thus the fair price of oil, in his view, is $70 per barrel.

“Outside OPEC” can be summed up in three words: the USA, Canada and Brazil. It’s likely the US could significantly increase its production, especially if Donald Trump wins the next presidential election and fulfils his promise to significantly relax environmental restrictions on oil production and transportation. He promised the country cheap fuel.

The reduction in the use of fossil fuels is another powerful factor pushing oil prices down. The rapid increase in electric vehicles, and the designation of nuclear power plants as “low-carbon” energy sources, are all set to reduce demand for oil in Europe, which is the second-largest importer of oil and petroleum products after China.