American consumers are enjoying the benefits of falling gasoline prices. According to American Automobile Association statistics, the average domestic gasoline price has dropped nearly 25% from the high in June.
While releasing strategic reserves, the U.S. government is also working hard to advance the Iran nuclear deal. U.S. President Biden hopes to suppress oil prices by further expanding supply to calm rising inflationary pressure and unfavorable domestic elections.
However, as the leader of OPEC, Saudi Arabia no longer sits idly by when oil prices fall below $90, suggesting that it may force OPEC+ to take action to reduce production.
Tamas Varga, senior market analyst at crude oil broker PVM Oil Associates, said in an interview with China Business News reporter that the global economy is showing disturbing signals, and the efforts of central banks to curb inflation have created potential risk. At the same time, the return of production capacity behind the Iran nuclear deal negotiations will undoubtedly have a significant impact on the current supply and demand situation. He believes that Saudi Arabia's statement is a signal. The direction of Iran's crude oil will affect the next production capacity decision, and the game between Russia and Europe on energy issues is also expected to become a potential factor in pushing up oil prices.
OPEC production cuts are forming a consensus
In August this year, with the release of 648,000 barrels/day of production capacity quotas by the oil-producing country alliance OPEC+, the production reduction plan that began in May 2020 came to an end. To meet market demand and respond to pressure from U.S. President Joe Biden, the group agreed earlier this month to increase production quotas by an additional 100,000 barrels per day in September.
Now, the production increase plan may come to an abrupt end. International oil prices fell below US$90 last week. The United States and Iran are moving towards resuming the nuclear agreement. This agreement will allow Iranian oil to re-enter the market and may also undermine the results of OPEC+ in maintaining market balance. Industry statistics show that this round of 27-month production reduction agreement has had an important impact on the stability of the oil market after the epidemic. In July this year, the production level of 28.9 million barrels per day brought daily income of US$3.137 billion to various countries, creating a record It is the second highest level since 2014 and six times higher than during the epidemic panic in April 2020.
Saudi Energy Minister Abdulaziz bin Salman signaled another production cut last week. He told the media last week that OPEC+ has the ability and flexibility to meet challenges. He believes that the oil futures market has fallen into a "self-perpetuating vicious cycle of extremely low liquidity and extreme volatility," making hedging and risk management costs too high for market participants. He also said the price decline was based on "unsubstantiated" demand-destroying information and confusion over proposed U.S. sanctions, embargoes and price caps on Russian oil. "Soon, we will start working on a new agreement after 2022." Salman did not disclose more details.
Varga told China Business News that Saudi Arabia’s statement deserves attention, as this is not the first time that such verbal intervention has occurred. In 2014, when the Crimean crisis broke out, Ali Al-Naimi, then Saudi Energy Minister, said that $100 is a fair price for everyone—consumers and producers. , oil companies...it's a good price. Likewise, this time Saudi Arabia is reminding the market that there is a bottom line for falling oil prices.
In fact, the proposal to limit production has reached a key consensus within OPEC. OPEC's rotating chairman and Congolese Oil Minister Bruno Jean-Richard Itoua said that the Saudi Energy Minister's proposal to consider reducing market volatility was "in line with OPEC's views and objectives" and that he might support such an action. China Business News reporter noted that in addition to Saudi Arabia, including Iraq and Kuwait , the two major oil-producing countries, as well as Oman , Algeria and Venezuela and Equatorial Guinea other countries’ energy ministers have announced in the past week that Expressed support for OPEC+ to maintain market stability.
The progress of of the Iran nuclear agreement will become a major variable affecting OPEC+ production capacity decisions. There are reports that the Organization of the Petroleum Exporting Countries (OPEC) will consider cutting production to offset any increases from Iran if Iran agrees to return to the nuclear deal. The possibility of reaching an agreement is gradually increasing after Iran gave up some of its demands for negotiations.U.S. officials said last week that a "final draft" of Iran's response to and the EU was being worked on, after which the parties would again exchange technical details and hold a joint committee meeting to oversee the deal. Iran will receive billions of dollars in sanctions relief in exchange for curbs on its nuclear program aimed at preventing it from developing nuclear weapons. Uncertainty remains, and in addition to opposition within the U.S. Congress, America's largest ally in the Middle East, Israel, has also expressed concerns. Israeli Deputy Prime Minister Naftali Bennett called on the Biden administration to abandon the agreement with Iran. "Israel does not commit to abide by any restrictions in the agreement and will use all available tools to prevent the development of Iran's nuclear program."
Varga told the reporter A financial reporter, according to data from the International Energy Agency (IEA), world oil supply has recently reached a new peak since the epidemic. Monthly reports from the three major institutions also hinted that global oil production is exceeding consumption and may continue until the end of this year. If coupled with the possibility of the Iran nuclear deal, new crude oil supply will reach at least 1 million barrels per day, and OPEC's reasons for reducing production become very strong.
Uncertainty on the demand side
Investors' concerns about the demand outlook are also an important factor in the recent impact on international oil prices. Signs of a global economic slowdown are becoming increasingly apparent, and concerns about a euro zone recession have once again intensified due to the continued rise in energy prices. At the same time, under the pressure of the Federal Reserve's interest rate hike policy, the pressure of a slowdown in the U.S. economy is also emerging. In August, the S&P Global U.S. Composite Purchasing Managers Index (PMI) fell at the fastest rate since 2020, and fell below the peak for two consecutive months. Dead line.
U.S. fuel consumption is falling as the summer driving season comes to an end. Data from the U.S. Energy Information Administration (EIA) show that the daily supply of finished vehicle gasoline, a key indicator of demand, fell by 914,000 barrels last week to 8.434 million barrels.
Varga told China Business News that judging from the decrease in premiums on futures contracts, the tight spot supply situation has eased compared to July. Last week, the spread of Brent crude oil futures shrank to a minimum of about 60 cents, and the spread of WTI crude oil futures also dropped to 33 cents from nearly $2 in late July. In addition, the impact of unfavorable economic fundamentals on market sentiment has also become a driver of the decline.
There is no shortage of bullish voices on Wall Street . Bank of America believes that although oil prices have been pushed downwards despite continued market recession expectations, geopolitical conflicts still exist and uncertainty will push oil prices back to highs at any time. In addition, the EU/US has set a ceiling on Russian oil prices, which may trigger Russia to cut production, which is expected to push the price of Brent crude oil to above US$130 per barrel.
Goldman Sachs Commodities Jeff Currie, director of research, issued a report saying that the recent sharp decline in the market is "irrational", although the interest rate and inflation curve hint that the economy is about to slow down and weaken. The combination of good demand, falling inventories and tight supply should push oil prices higher. Currie also said oil prices could rebound in the fall as markets tighten.
Varga believes that there may be room for fluctuations in oil prices of $20 in the future. In addition to OPEC+, it will also depend on the demand destruction caused by inflationary pressure and the consequent rise in interest rates, as well as Russia and Europe on energy issues. the outcome of the game. fuel switching and lower exports of Russian products will be factors supporting oil prices, with European benchmark gas contracts currently above 300 euros and the CME Group gas contract rising to its highest level since 2008. In this uncertain situation, if adequate supplies are to be ensured for home heating and industrial use, one of the important alternatives is crude oil. Heating oil futures contracts have risen 20% in the past two weeks, with refined product and crude oil crack spreads widening rapidly, signaling a recovery in demand for fuel switching.
