The oil price has dropped more than $6 per barrel in one day from its high of $92 to $84 currently. All of a sudden, the markets switched, shocking the oil producers, as they were anticipating the price to reach the $100 level.

The questions now are - How will the oil ministers face their superiors who were assured that the oil price will not go below $90 since OPEC+ is in full command? Marketing forces collided, claiming that OPEC+ would go into some sort of panic mode. What are the factors behind such a switch that brought the oil price to the $80 level? Is it the consumers’ reaction to the surge in oil prices, and the fear of inflation? Or did the increase in banking rates make everything more expensive, which led almost every consumer to stop spending and focus their attention on curtailing their buying habits? We repeat the drop in oil prices by almost ten percent in just a single day is an indication of panic and of oil scarcity in the coming days. The demand for oil did not drop much, due to which this one-day price reduction is hard to understand. It is known at the same time that the US administration desires to fill up its strategic reserve, which has reached the lowest level compared to the past many years, especially with the winter season knocking on the doors. Could this factor be the main cause of oil price reduction? Nevertheless, filling up the strategic reserve should have been the factor to keep oil prices firm and not the cause for their reduction. Could it be the fear of rising prices? The world economy as a whole looks healthy.

The US job growth is still on, and the demand is strong. However, the fear of higher gasoline prices, coupled with inflation, puts oil prices under pressure. Perhaps, it is the speculators who are playing the markets with their own marketing tools, in defiance of the resolutions of the OPEC+. Now what action is available for OPEC+? It will certainly be to go along with their production cuts until the end of this year. This would be better, as all members seem to agree to maintain the production cuts into next year without any hesitation. Perhaps with further reductions, it might bring back oil prices to the $90 level. Nevertheless, it looks like the level of $100 a barrel seems far away. The shocking element is how the oil market became so fragile that in one day, the price dropped by ten percent, and the oil organization simply couldn’t do anything about it. The US oil producers are reluctant to increase production and are awaiting OPEC+ to correct the prices.

They will stay on the sidelines as long as they are making money, distributing profits and dividends, and buying stocks. The best scenario available to them, leaving the rest to OPEC+. The weakening of oil prices may bring some other ideas and plans to OPEC+, which will be thinking out of the box if the demand for oil is on track, and with no impact of switching to other non-fossil fuels. Further cuts are on the table to keep oil prices at a respectful level to cover the cost of investments in new oils, as well as protect and work on recovering the cost of banks’ interest rates to balance their books by the end of the fiscal year of OPEC+. Perhaps, the oil producers lost track in anticipation of the arrival of the $100 level, which now looks too far away. OPEC+ needs to sit around the table and think out of the box to ensure a level of $90 per barrel, which their bosses are adamant to achieve, as advised before.

By Kamel Al-Harami
Independent Oil Analyst
Email: [email protected]