Crude prices resumed their downward trend on Monday, hitting lows not seen since April 8th in the middle of the post-tariff market selloff. If it were to close below $60/bbl, that would be the lowest since early 2021 in the middle of the pandemic. The latest leg downward was in the aftermath of OPEC+ agreeing to increase production by another 411K bbl over the weekend. The increased production would become available in June.
Reportedly, Saudi Arabia has been pushing for increasing production as it has been increasingly frustrated by other countries exceeding production quotas. Primarily Iraq and Kazakhstan are seen as the major culprits, and were cited in the prior OPEC meeting. Previously, Saudi Arabia had been leading the production curtailments (virtually the entirety of the curtailments are of Saudi production).
How Low Can It Go
Analysts had speculated that the Kingdom was trying to keep prices above, or at least towards, $100/bbl. The new scenario indicates a turn around for Saudi Arabia as it looks to recapture market share. This has brought back memories of when crude prices actually briefly turned negative in the pandemic, as demand dried up and the market faced oversupply.
Both OPEC and the IEA have come around to agree that demand will likely be weaker this year as the global economy faces the consequences of the US-led trade war. This creates a scenario where supply is increasing faster than demand, and will likely put increased downward pressure on crude. The crude futures curve suggests that the market is bracing for further production increases that will lower prices going into the second half of the year.
How Much Can Increase
The recent unwinding of production cuts were the second time in a row that OPEC+ boosted production more than analysts expected. Combined with prior increases, they represent a 44% unwinding of the production curtailments that had been in force over the last couple of years. At the current rate of unwinding, analysts believe that a full unwinding could be reached by October, bringing 2.2 million more bbl/day on the market.
That would exceed what both the IEA and OPEC expect the increase in demand this year to be. The more conservative International Energy Agency most recently predicted oil demand to increase by 730K bbl this year, meaning that the current production increases are already higher than demand. That’s if the IEA is correct. This contrasts with OPEC’s forecast for oil demand to increase by 1.3M bbl/day. However, both have recently cut back their projections for oil buying and could do so again.
Down for the Count, or Relief in Sight?
The expectations for slow growth in demand are based on a relatively uncertain outcome of the trade wars. Already there has been some negative growth impact, but so far demand in the world’s largest consumer, the US, has remained steady. Lower prices at the pump in the US might actually provide a floor for crude as more Americans drive. That’s assuming the American economy remains resilient.
A resolution of the trade situation could come at any moment, and that would likely see a concurrent rise in optimism on the economy that could support the price of crude. But, the longer the trade war drags on, the more pessimistic economists become about the economic outlook, the less of a rebound could be expected if a resolution is reached.