No Additional Production Increase, Yet Oil Prices Plummet, Why?

WSJ "Growth Slowdown Hinders Oil Price Rise"

[Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] International oil prices surged more than 40% to close the first half of the year. However, concerns over a global economic recession have increased, leading to uncertain prospects for the second half of the year. In response, the Organization of the Petroleum Exporting Countries (OPEC) and the non-OPEC major oil-producing countries, collectively known as ‘OPEC Plus (OPEC+)’, decided to freeze production at their regular July meeting, but international oil prices plummeted on the last trading day of the first half.

According to Bloomberg News, on the 30th of last month (local time), the August delivery futures price of West Texas Intermediate (WTI) crude oil on the New York Mercantile Exchange (NYMEX) closed at $105.76 per barrel, down $4.02 (-3.7%) from the previous day.

On the same day, the August delivery of North Sea Brent crude oil, which expired, closed at $114.81 per barrel, down $1.45 (-1.3%) from the previous day. The newly front-month Brent crude oil September delivery futures price dropped sharply by $3.42 (-3.0%) to $109.03 per barrel.

MarketWatch, citing Dow Jones market data, reported that WTI futures prices rose 41% and Brent futures prices rose 48% in the first half of this year.

At the July regular meeting, OPEC+ decided to maintain the daily production increase for August at 648,000 barrels, the same as in July. Previously, at the June regular meeting earlier last month, OPEC+ had increased the daily production increment from 432,000 barrels to 648,000 barrels starting in July, a 50% increase. Given that production increases had already been decided and concerns over demand reduction due to a potential economic downturn, they refused any further production increases.

The Wall Street Journal analyzed that central banks, including the Federal Reserve (Fed), are trying to reduce demand even at the cost of slowing growth, and that the slowdown in growth is an obstacle to rising oil prices. Manish Deshpande, an analyst at Barclays, said, "Growth is slowing, and accordingly, future oil demand will also decrease."

The futures market reflects expectations that oil prices will decline in the long term. This is evidenced by the phenomenon where the price of the near-month contract is lower than that of the front-month contract. According to FactSet, as of that day, the December delivery Brent crude oil futures price was $101.27 per barrel, about $8 lower than the current front-month September delivery. The futures price for December delivery next year is below $93 per barrel.

Meanwhile, U.S. President Joe Biden, who is scheduled to visit Saudi Arabia in mid-July, is expected to again request increased production from Middle Eastern countries. Although uncertainty over rising oil prices has increased, prices remain at their highest level in 10 years.