OPEC+ Extends Production Cuts for 1 Year
Downward Trend Expected Amid Future Reductions
Oil Producers Plan Gradual End to Cuts
Factors Pressuring Oil Prices Downward
Israel Ceasefire Pressure Also Influences
Oil Price Rise Unlikely Before US Election
Crude oil prices have fallen to their lowest level in four months. Although the new Organization of the Petroleum Exporting Countries (OPEC) cartel recently agreed to extend crude oil production cuts for another year, there are expectations that the scale of the cuts will be reduced starting in the second half of next year.
International Oil Prices at Four-Month Low
On the 3rd (local time) at the New York Mercantile Exchange, the near-month July delivery West Texas Intermediate (WTI) crude oil fell 3.60% to close at $74.22 per barrel. This is the lowest level in over four months since February 7. The global benchmark, August delivery Brent crude oil, dropped 3.4% to $78.36 per barrel. This is the lowest price since February 5. Although the U.S. government announced it would purchase 3 million barrels of Strategic Petroleum Reserve (SPR) at an average price of $77.69 per barrel that day, it did not prevent the price decline.
Examining the ‘Oil Cartel’ Production Cut Extension
The main factor driving the sharp drop in oil prices was the decision by major oil-producing countries to gradually end voluntary production cuts. At the OPEC+ (OPEC and allied oil-producing countries including Russia) meeting on the 2nd, although the production cut measures were extended for one year, the supply outlook was interpreted positively. Saudi Arabia, Russia, and six other oil-producing countries agreed to gradually lift the official production cut quota of 2 million barrels starting in October next year, leading to expectations of increased supply, Bloomberg noted.
Goldman Sachs explained in a memo that “the phased removal of voluntary production cuts indicates a strong willingness among OPEC+ member countries to restore production levels, which acted as a downward pressure factor on oil prices.”
On the same day, U.S. President Joe Biden unveiled a ceasefire plan to end the war in Gaza and urged both Israel and Hamas to accept it, which also contributed to the weak oil prices.
International oil prices have been on a downward trend since early April due to easing geopolitical risks related to the Middle East and Ukraine, as well as signs of weakening demand. The fact that OPEC+ members Iraq and the United Arab Emirates have consistently exceeded their oil production quotas also had an impact.
Significant Oil Price Increase Unlikely Ahead of U.S. Presidential Election
Experts analyzed that the growing influence of the United States in the oil industry is also a factor causing weak oil prices. WTI is priced about 5% lower compared to Brent and other producing countries’ crude oil. This is the result of the U.S. becoming the world’s largest oil producer by pumping over 13 million barrels per day last year. Recently, the U.S. shale oil industry has been experiencing a boom in mergers and acquisitions (M&A), which is expected to lower production costs and potentially push oil prices down further.
With the U.S. presidential election, the world’s largest event, scheduled for November, a significant rise in oil prices is unlikely. The Wall Street Journal (WSJ) reported that since oil price increases are directly linked to inflation, how well this is managed will be important in the presidential election.
Although President Joe Biden has shown an anti-fossil fuel stance, analysts believe that since he is seeking re-election, he will at least not hinder domestic industry production during this period.
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