The $70 mark is history in the oil market. The barrel of Brent, the benchmark in Europe, has left this mark for the first time since November 2021, with the world still leaving the pandemic behind and months before the Russian invasion of Ukraine turned the energy sector upside down. The fall is around $10 in just two weeks, when it was around $80, a level at which practically all producing countries feel comfortable. Now it is the consumers, with Europe and China at the forefront, who are smiling at a downward spiral that does not seem to have come to an end: at least this is what some of the world’s leading energy houses believe. trading of raw materials.
“We are likely to hit $60 at some point relatively soon,” Ben Luckock, head of oil analysis at Trafigura, said at a conference in Singapore on Monday. “We produce far more oil than we consume and the forecasts suggest that this balance will worsen in the coming years,” added Torbjörn Törnqvist, chief executive of Gunvor, another of the sector’s big names. Most forecasts point to an increase in demand of just over a million barrels a day, compared with a supply that will increase by around 1.5 million outside the expanded version of the Organization of the Petroleum Exporting Countries (OPEC+), led by the United States, Canada, Brazil and Guyana.
There are basically two factors behind the fall. The first, and perhaps most important, is weaker demand than expected a few months ago. “We are not seeing the expected growth in the Chinese economy, with a major crisis in construction, a large consumer of diesel, and an increasing number of electric cars,” says Jorge León, vice president of the energy consultancy Rystad Energy. On the other side of the Pacific, the recent — and significant — slowdown in employment in the US is also having an influence. “These are major risks in the two largest economies in the world,” he summarises by telephone.
The second factor is also statistical in nature: the downward revision of the demand forecast, this Tuesday, in the OPEC monthly report. A particularly significant correction, given that its forecasts tend to be too optimistic for its interests (not for those of the fight against climate change). “It is the second month that it has reduced its forecast,” adds León. “Between July 2023 and July 2024, it argued that demand would grow by 2.25 million barrels per day this year, and now it is already two million,” adds the man who worked for years as an analyst for the cartel.
This sharp drop in the price of crude oil is causing problems for several market players. First of all, OPEC members, who mostly require much higher levels to stabilise their public finances. Saudi Arabia, the de facto leader of the group, The price needs to be around 100 dollars to avoid running into a deficitaccording to calculations by the International Monetary Fund (IMF). Outside the club, which is seeing how it is losing control of the market —still little by little—, there are also victims: in the US, for example, many of the companies that extract by hydraulic fracturing (fracking) see their profitability greatly reduced at these price levels.
Clear path for the ECB
On the other hand, two winners stand out: Europe, China and, to a lesser extent, India, the three largest importers of crude oil on the planet and for whom a single dollar drop has a significant impact on their trade balances. In the case of the Old Continent, the timing of this new drop in price is especially relevant: just when the ECB is preparing a new rate cut in the face of the loss of vigour of inflation. The lowering of fuel prices not only helps the pockets of drivers, but also has an impact on other goods in which transport plays a relevant role.
Despite the recent trend, León sees a couple of factors that could turn the tide and push up the price of crude: an aggravation of geopolitical tension, especially in the Middle East, or a victory for Donald Trump in the US elections on November 5. In the latter scenario, he says, sanctions on Venezuelan and Iranian oil would be much more likely. “And we are talking about very significant volumes,” he warns.
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