Oil prices continued to fall on Wednesday, as investors weighed how effectively the extension of OPEC+ cuts tightened supply against a worsening demand outlook in China.
Brent crude futures fell 63 cents, or 0.82 percent, to $76.57 a barrel. US West Texas Intermediate crude futures fell 58 cents, or 0.8%, to $71.74 a barrel. The Organization of the Petroleum Exporting Countries and allies such as Russia (OPEC+) agreed to voluntary production cuts of about 2.2 million bpd for the first quarter of 2024 late last week. Saudi and Russian officials added this week that the cuts could be extended or deepened beyond March.
But the two benchmark crudes closed at the lowest level since the sixth of July in the previous session, for four consecutive days of losses.
“The decision to cut production further from January failed to stimulate the market, and recent assurances, apparently coordinated, from Saudi Arabia and Russia to extend restrictions beyond the first quarter of 2024 or even deepen cuts if necessary, also fell on deaf ears.” Analyst Tamas Varga said.
Ratings agency Moody’s downgraded its outlook for China’s rating of A1 to negative from stable on Tuesday. China will release preliminary trade data, including crude oil import data, on Thursday. Earlier forecasts showed that China’s refinery operation fell in November. At his meeting in Abu Dhabi, Putin discussed Russia and the UAE’s cooperation in OPEC+ and other major oil and gas projects.
This was a surplus that existed in the market that kept prices limited. Now that these incomplete drilled wells are gone and there are not enough wells being drilled now, we no longer have the support we had in the hydraulic fracturing process we had five years ago.
Oil prices fall sharply: WTI and Brent crude market trending lower
The WTI crude market collapsed further during Wednesday’s session, as we continue to see a lot of noisy behavior. Crude oil markets price the idea of a major recession and a serious shortage of demand. It has been a bit surprising lately, when OPEC has been unable to do much in terms of production cuts, so markets are now making them pay for it.
The rallies at this point will continue to see resistance, especially near the $72.50 level, which was previously supported. A certain amount of “market memory” can appear in the image at this point. If we break above that level, the market will become more chaotic, but as things look now, the WTI market seems poised to drop to the $67.50 zone.
Brent markets collapsed significantly during the trading session on Wednesday as well, and easily broke through the $77 level. At this point, the Brent market seems poised to go down to $72.50, its lowest level in recent times. There’s a lot of noise in that area, so I don’t know if we’ll break below that level, but Brent is also trying to price some kind of massive economic crash and, of course, low demand. If so, this is not a good outlook for the economy as a whole.
At this point, I think it will be the same in both grades of crude oil, just sell short-term advances to show signs of fatigue, and this may continue to be market behavior over the next few days. However, Friday’s session includes the announcement of the nonfarm payroll report, which could lead to a bit of fluctuation in the mix.
Oil Price Volatility: Saudi Arabia’s Revenues Exceed Expectations but with Growing Budget Deficit
Saudi Arabia posted higher-than-expected budget revenues this year despite a sharp drop in oil prices and production.
However, increased spending on Crown Prince Mohammed bin Salman’s multi-trillion dollar plan to diversify the economy has led to the budget deficit, according to official figures published Wednesday.
Revenues for 2023 are set to reach 1.19 trillion riyals ($318 billion), more than 5 percent higher than estimates in the previous year’s budget. Spending accelerated at a faster rate to 1.28 trillion riyals.
For next year, revenues are expected to reach 1.17 trillion riyals, while spending is expected to reach 1.25 trillion riyals, resulting in a deficit equivalent to 2% of economic output. The forecast was unchanged from the initial forecast published in October.
Saudi Arabia cut the official selling price (OSP) of leading Arabian Light crude to Asia in January for the first time in seven months. Varga added that lowering official selling prices could be “a sign that demand for barrels is having a hard time gaining momentum.”
Concerns about China’s economic health, which could limit overall fuel demand in the world’s second-largest oil consumer, have also weighed on prices.
Russian President Vladimir Putin traveled to the United Arab Emirates and Saudi Arabia on Wednesday to meet with UAE President Sheikh Mohammed bin Zayed Al Nahyan and Saudi Crown Prince Mohammed bin Salman.
This means that there is an imbalance in supply and demand now in the US. At the same time, the Saudis are cutting supplies. All of this is happening at the same time as you move away from the oil-dependent economy – be it electric cars, batteries or solar hydrogen. These transitions can be very bumpy and will be very volatile.
Oil Market Shifts: Bullish Expectations After Strategic Changes
Crude oil prices have seen significant volatility in recent months due to concern about demand and a stronger dollar. The next bull market for oil may be two years away, and there are several reasons for this. For starters, the Saudis and Russians reached an agreement within OPEC to curb supply that drove up prices earlier this year. Before Covid, OPEC’s strategy was to pump oil at full capacity and keep prices in a limited price range to encourage oil demand. Covid forced OPEC to adjust this strategy and cut production in a dramatic way. They have slowly increased oil production since 2020, until the last new quota agreement. As the Biden administration reorganized US energy policy and Russia invaded Ukraine, the geopolitical landscape also changed..
Besides OPEC and geopolitics, there is another big issue related to the United States, where production and hydraulic fracturing have become bad. It is now considered a dirty resource and does not attract the attention it was 10 years ago. Investment in these sectors has already fallen over the past three to five years, and I don’t expect that to come back. A lot of traditional energy investment funds are now flowing into green projects such as storing electric cars, solar energy, and batteries. The profitability of many exploration and production companies was also in doubt during the initial drilling boom 10 years ago, hurting many investors, giving them little incentive to invest again..
As a result, fewer oil wells are drilled. Unfinished drilled wells are already falling, especially in the Permian period. For example, three or four years ago, the Permian had more than 3,500 wells dug that were not fully completed. It is now less than a thousand.
