The recent plunge in oil prices stems from the Saudi-led OPEC reversing its previous production cuts in an effort to reclaim market share. Concurrently, US shale oil producers have reached a record high output of over 13.6 million barrels per day in July. The simultaneous increase in supply from these two major forces has exacerbated the situation. The drop in oil prices has lowered US gasoline costs to $3.06 per gallon, benefiting consumers; however, the oil industry faces narrowing profit margins and pressure to reduce staff.
Concerns over oversupply and a slowing global economy are pushing US crude prices to their lowest level since the post-COVID recovery, with the simultaneous production increases from both the US and OPEC aggravating the market imbalance.
On Thursday, US West Texas Intermediate (WTI) crude futures closed at $56.99 per barrel, down 2.2%, marking the lowest price since February 2021 and a 19% decline over the past year. This week's decrease has surpassed the lows hit earlier this spring when fears over economic turmoil from a series of tariffs announced by Trump were prevalent.
The root cause of this current oil price decline is the Saudi-led OPEC’s decision to restore production cuts to regain market share while US shale oil producers maintained incredibly high output levels. Analysts indicate that the decline in oil prices is favorable for American consumers as it suggests further reductions in prices for gasoline, diesel, aviation fuel, and heating oil. According to AAA, the average price for regular unleaded gasoline nationwide was $3.057 per gallon on Thursday, around 15 cents lower than a year ago. However, this poses a severe challenge to the US oil industry, which is already facing shrinking margins and large-scale layoffs.
OPEC is increasing production while US output remains at historical highs. Earlier this month, OPEC announced it would boost output by 137,000 barrels per day in November, matching the increase for October. The organization sharply reduced its production cuts in September, abandoning the limits put in place when energy prices fell from the highs following the Russia-Ukraine conflict.
OPEC expects demand to rise next year, leading the market back towards balance, aiming to reclaim market share from free-market producers like the US, Brazil, and Guyana—a continuation of the pricing wars seen over the last decade.
Market forecasting organizations, including the International Energy Agency, predict that the oversupply situation is likely to worsen in the coming months as producers from the Middle East to Midland, Texas, are ramping up production, driven by rising prices rather than the falling levels seen in recent years.
Moreover, the latest data from the US Energy Information Administration reveals that US oil producers set a new record by producing over 13.6 million barrels per day in July. Despite a government shutdown, the continued release of weekly federal oil reports indicates that production has remained near this level.
Despite a 63-rig decrease in the number of US oil drilling rigs compared to last year, efficiency improvements and the scaling up of wells enable domestic producers to extract more crude with fewer resources. East Daley Analytics forecasts that US oil production will remain around the record 13.6 million barrels per day by the end of this year. According to Senior Analyst Chris Noonan:
US producers are unlikely to slow down, partly because they are typically obligated to supply other fuels such as natural gas and propane that come from the same well.
Noonan additionally stated:
Producers are unlikely to abandon drilling projects that they have invested millions of dollars in and deployed massive drilling rigs. If they pause, they risk losing market share and missing out on price rebounds, as it may take months for drilling projects to start generating returns.
Notably, five years ago, demand for transportation fuels plummeted during pandemic lockdowns, resulting in US oil prices falling to negative values for the first time in history, where sellers needed to pay buyers to offload oil. Producers were forced to store the surplus in offshore tankers, and it took about a year for prices to recover.
Currently, substantial oil inventories are once again stored at sea. The International Energy Agency indicates that offshore oil stocks increased by approximately 340,000 barrels per day in September, the largest rise since the pandemic began.
While US drivers benefit from lower fuel costs, the oil industry faces substantial pressure. Many states, including Michigan, Ohio, Texas, and Colorado, have seen average gas prices drop below $3 per gallon. The US Energy Information Administration earlier predicted that national average gas prices could reach $2.90 per gallon next year.
Reports suggest that Trump promised voters to reduce fuel prices and spent most of his term dismantling efforts put in place by the previous administration to promote renewable energy, instead advocating for fossil fuels. His encouragement of domestic and international drilling was met with trade policies that dampened expectations for global economic growth, subsequently weakening oil consumption prospects.
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