Rising global supply and an uncertain demand outlook are dragging oil prices lower, with US and global crude hitting multi-month lows on Wednesday.
West Texas Intermediate plunged 4.12% to $69.37 a barrel and Brent crude, the international benchmark, fell 3.68% to $74.39 a barrel.
The latest drop comes as federal data showed US gasoline inventories rose from a week earlier, raising further questions about oil demand. At the same time, the market is digesting a surge in US oil production, which hit all-time records in September and October.
The boom in US production has led some commentators to warn that OPEC+, particularly Saudi Arabia, could “flood” the market to counter the US shale oil boom. Flooding the market with oil would have the effect of crashing the price in order to drive smaller suppliers out of the market.
Wednesday’s falls add to a series of recent declines, which the Organisation of Petroleum Exporting Countries has sought to counter by announcing production cuts led by Saudi Arabia. The country’s energy minister, Prince Abdulaziz bin Salam, told Bloomberg earlier this week that supply cuts could remain on the table beyond March.
Energy firm Kpler forecasts that Saudi Arabia will maintain its one million barrels per day cuts for the duration of next year, but traders have questioned the commitment of OPEC+ members to the voluntary cuts, which has contributed to the recent string of declines.
“While you’ve got OPEC+ cutting production, you’ve got a number of countries outside the group increasing production, and actually within the group,” Matt Smith, Kpler’s lead oil analyst for the Americas, told Business Insider. “The US has increased, Canada, Guyana, Brazil. And ironically, within OPEC, you have Venezuela and Iran increasing. Basically, you have OPEC+ making room for non-OPEC supply as the demand picture starts to soften.”
Meanwhile in the US, signs of softening economic conditions also point to slowing activity in the world’s largest economy. Gas prices have fallen to an 11-month low of $3.22 a barrel, according to AAA, and Wednesday’s lower-than-expected ADP payrolls data points to a cooling demand narrative.
“The oil market is increasingly sensitive to signs and hints that the economic landscape continues to soften,” said Quincy Krosby, chief global strategist at LPL Financial. “Weaker crude prices are a reflection of a softening economy.”
Weakening demand can also be seen in China, which is grappling with a deepening economic malaise that’s weighing on all sectors of its economy. Moody’s downgraded its outlook on China’s sovereign debt on Tuesday, and pessimism over Beijing’s ability to steer the country out of its property turmoil, declining foreign investment and sluggish economic activity is another headwind for crude prices.
“Oil’s four-day losing streak is prompting high-level discussions between political leaders in the East, with the head of the Kremlin planning to visit the heads of Dubai and Riyadh today,” said José Torres, senior economist at Interactive Brokers. “Officials seem willing to continue to cut production.”
