After experiencing a brief glimmer of hope due to OPEC announcing production cuts, the oil market has yet again been weighed down by a variety of factors, including a weakened stock market and Trump's tweet about how Saudi Arabia should not cut oil production.
The US benchmark for oil plummeted to below $60 a barrel on Monday, down a whopping 11 sessions consecutive sessions. This is the lowest point for crude oil in 34 years.
The decline can largely be attributed to two things: first, overproduction as a result of the trade war between China and the US, which has caused oil inventories in America to boom and exceed demand by a large margin. This has exerted a downward pressure on prices, further exacerbated by Trump's decision to impose sanctions on Iran, a key player in the oil industry.
That said, the notion of an oversupplied market could be overhyped, and the problem could also lie in erratic demand cycles. Matt Badiali, senior research analyst at Banyan Hill, says: "My research showed that, during the run-up to Iran sanctions, many of the Asian countries cut back on Iranian oil imports. China included. Those countries cut about 900,000 bbl/day of Iranian exports. That demand didn't go away, it was filled by the US and Saudi Arabia. Then the US government issued waivers to most of Iran's oil trading partners. Now that those same countries got waivers, they are buying Iranian crude again...leaving a glut of oil on the market. I agree that the demand hasn't declined. Supply, particularly from the US is up."
So what's next? Today at a conference in Abu Dhabi, Saudi energy minister Khalid Al Falih said the kingdom's oil output would decline by 500,000 barrels per day in December. He also stated that OPEC could make further cuts next year if needed. Though the exact volume of cuts being made is unclear, a senior OPEC source said the cartel is discussing cutting production by as much as 1.2 million barrels per day. More will be revealed at the next OPEC meeting in Vienna on December 6.
"The consensus among all members is that we need to do whatever it takes to balance the market," Al Falih said. "If that means trimming supply by a million [barrels per day], we will do it."
It is unclear whether Russia will follow the production cuts protocol, but let it be noted that currently, refinery maintenance season is also ongoing. That is, oil production capacity has actually lately been lower. This needs to be taken into account when projecting future crude oil prices, as the current perception of supply may be an underestimate.
Michael Bertuccio, President & CEO of HB2 Energy, said: "I believe there may be more immediate and shorter-term drivers to oil prices falling - particularly the West Texas Intermediate (WTI) cash market in Cushing, Oklahoma. This is refinery maintenance season. Of the ~14 million barrels per day (MMB/D) of refining capacity in PADD 2 & 3, ~6% has been offline."
