Oil has continued its slide, as investors tried to divine the odds of supply increasing after Joe Biden’s Middle East trip, and the dollar continues to strengthen.
West Texas Intermediate fell below $97 per barrel after an almost 7% drop last week. US energy envoy Amos Hochstein said he feels it highly likely Persian Gulf producers will increase supply following President Biden’s entreaties in the region during his trip last week.
Investors were also focused on the fact Libyan crude is on track for a return after a political dispute in the country shut down all of its production capacity. That should yield an additional 700,000 barrels per day added to the global supply. Prime Minister Abdul Hamid Dbeibah said exports are on track for a return after he replaced the leadership at the state-run oil company National Oil Corp.
Crude has been in decline since mid-June as the markets were gripped with fears of the onset of a recession, amid record inflation and increased monetary tightening by the Federal Reserve. While the drop has been welcome, prices are still high, leading to officials scrambling to try and get producers to increase supply to further drop prices and aid in combatting inflation, so central banks will not have to tighten the money supply too much, and risk triggering recessions across the globe.
Following Biden’s visit, Saudi officials emphasized all oil policy decisions would be determined according to market logic and within the OPEC+ coalition, which includes oil-producer Russia. The next OPEC+ meeting is scheduled for Aug 3rd.
Stephen Innes, managing partner at SPI Asset Management said, “The OPEC+ quota system ends in September, and attention is turning to what will happen next. I would not be surprised to see something packaged at the end of OPEC September agreement, or even sooner, that may allow those with spare capacity to up their quota a touch and Biden could declare a win.”
A stronger dollar means that commodities priced in dollars end up being more expensive when paid for with other currencies. The dollar’s value has been increasing as the Federal Reserve has increased interest rates, and issued statements promising more aggressive tightening policy moves over the coming months, until inflation is under control.
Fuel costs have also been helped by gas and diesel sales in India dropping precipitously, as seasonal rains crushed demand in the world’s third-biggest energy consumer. It was the first monthly decline in consumption there in three months.
As futures have fallen lately, the market still remains in backwardation, where near term contracts are priced above longer term contracts. The prompt spread on Brent, the gap between its two closets contracts, was nearly $4 a barrel, a significant rise from the $2.73 it measured a month ago. This would indicate investors increasingly see oil’s peak in their rearview mirror, and only declining prices moving forward for the immediate future.
