Quick Bite –Oil gets left behind
At a time when gold, silver, many industrial metals and agricultural products are rising strongly, crude oil is weak. Indeed, crude prices have fallen 20% over the last 12 months.
Oil markets are being pulled in different directions by a range of forces, with the potential for supply losses stemming from new sanctions on Russia and Iran coming against a backdrop of higher OPEC+ supply and the prospect of increasingly bloated oil balances. China continues to stockpile crude oil, helping keep Brent crude futures down. Prices have moved in a narrow band since August and at the time of writing Brent was $66/bbl, largely unchanged from a month earlier.
Toughened sanctions on Iran and Russia have so far had a relatively modest impact on supply and trade flows, even as exports from both countries have been trending lower in recent months. The EU ban on imports of refined products derived from Russian crude oil from the start of 2026 may yet curb output and upend trade patterns in the coming months.
Oil prices were little changed after OPEC+ agreed on 7 September to start unwinding its second tranche of supply cuts, in place since April 2023. The Group of Eight OPEC+ countries plan to raise its output target, but only slowly in order not to disrupt prices too much.
Source: Daily Chartbook
While a patchy global economy means that oil demand is somewhat slacker than is typical, a big part of the explanation for oil price weakness is the role played by Saudi Arabia and its desire to retain control (or at least be the dominant player) in the oil market.
Saudi Arabia is trying to achieve several objectives: claw back market share lost to Brazil, Guyana and US shale producers; rein in members of the cartel it dominates that routinely exceed quotas; and raise cash for massive infrastructure projects now beset by cost overruns and delays.
Source: Lukas Kuemmerle
Whatever Riyadh’s goals, the strategy has benefited the Trump administration. More Saudi crude has helped lower gas prices at the pump, something Trump has repeatedly called for. Trump wants interest rates to fall, and to enable that to happen, he needs gas prices to limit inflation.
Falling oil prices are helping to blunt the inflationary effects of Trump’s tariffs and boost the US economy just as households and businesses grow cautious. Average gas prices were $3.16 a gallon recently, down slightly from a year earlier.
Gold to Oil Ratio – This chart tracks the ratio of the price of gold per ounce over the price of West Texas Intermediate (WTI) crude oil per barrel. It tells you how many barrels of oil you can buy with one ounce of gold.
Source: Macrotrends
Saudi Arabia’s Oil Dependence
Saudi Arabia can pump crude oil at a cost of less than $10 a barrel, a huge cost advantage over US shale producers. Brent trades around $65 a barrel, down from around $75 at the end of last year, and considerably below the kingdom’s fiscal break-even price.
Despite years of trying to diversify its earnings, Saudi Arabia still derived 53% of revenue from the oil sector in the first half of this year. In the three months through June, total revenue fell 15%, as a 29% plunge in oil revenue wasn’t fully offset by a modest rise in other income.
Riyadh has sold assets and increased debt to ensure it can still fund its spending ambitions. Last year, it sold shares in the crown-jewel oil company, Aramco, and issued $65 billion of debt. Its Finance Ministry expects public debt to total 32% of gross domestic product by year-end, up from 5.8% a decade earlier.
While prices have held up relatively strongly to the supply added so far, there are now signs that the market is starting to shift. Unsold cargoes from the Middle East are accumulating and the futures forward curve is showing signs of near-term weakness. The International Energy Agency anticipates that inventories will pile up rapidly this quarter and that a record surplus will emerge in 2026 as global demand cools and supply across the Americas booms.
OPEC’s rising production
Source: FT
