Oil Prices Plummet to 5-Month Low Amidst Dollar Strength and Demand Fears

This decline marked the fourth consecutive day of losses, casting doubts on the effectiveness of OPEC+'s recently announced voluntary supply cuts.

Oil prices experienced a significant drop, reaching their lowest point in nearly five months due to a combination of factors, including a stronger U.S. dollar and concerns about demand.

This decline marked the fourth consecutive day of losses, casting doubts on the effectiveness of OPEC+’s recently announced voluntary supply cuts.

Craig Erlam, a senior market analyst at OANDA, noted that the OPEC+ agreement had failed to bolster prices, and the four consecutive days of declines suggested that traders were unimpressed with the outcome.

Brent crude oil futures fell by 1.1%, settling at $77.20 per barrel, while U.S. West Texas Intermediate (WTI) crude dropped by 1.0%, closing at $72.32.

These closing prices were the lowest for both benchmarks since July 6, and it marked the first time since May that WTI had seen four consecutive days of price declines.

Despite statements from Russian Deputy Prime Minister Alexander Novak indicating OPEC+’s readiness to deepen oil production cuts in the first quarter of 2024 if necessary, the market remained unconvinced. OPEC+ comprises the Organization of the Petroleum Exporting Countries and allies like Russia.

On November 30, OPEC+ had agreed to voluntary output cuts of approximately 2.2 million barrels per day (bpd) for the first quarter of 2024.

However, a significant portion of these cuts (about 1.3 million bpd) were an extension of existing voluntary curbs by Saudi Arabia and Russia.

The voluntary nature of the deal raised concerns about its effectiveness in reducing supply. Russia’s oil and gas revenues decreased in November due to fluctuations in profit-based tax payments.

Saudi Arabia also reacted to supply concerns by lowering the price of its flagship Arab Light crude to Asian customers in January, marking the first price reduction in seven months.

Meanwhile, Libya’s National Oil Corporation expressed its plans to increase oil output to 2 million bpd in the next three to five years.

In the United States, crude oil and fuel inventories increased, further contributing to the downward pressure on oil prices.

According to the American Petroleum Institute, crude stocks rose by 594,000 barrels, gasoline stockpiles increased by 2.8 million barrels, and distillate inventories rose by nearly 1.9 million barrels in the week ending December 1. Government data on stockpiles was expected to be released the following day.

Additionally, factors such as the strengthening U.S. dollar and concerns about global demand weighed on oil prices. China, the world’s largest oil importer, saw its currency, the yuan, being propped up by major state-owned banks to prevent it from weakening after Moody’s cut China’s outlook to negative.

Furthermore, discussions at the COP28 climate conference included the possibility of calling for a formal phase-out of fossil fuels as part of the final deal to address global warming.

The rising U.S. dollar and prospects of lower interest rates added to the uncertainty, with a stronger dollar potentially reducing oil demand by making it more expensive for buyers using other currencies, while lower interest rates could boost demand by making it cheaper for consumers to borrow money for spending.