Quick Bite – Oil Prices Continue to Weaken
At the time of writing (21 October), US sharemarket indexes are at all time highs, bond values are up as US 10yr yields dip below 4%, economic growth forecasts are being ratcheted up, and corporate earnings (so far) are better than expected. In the commodities space, precious metals and industrial metals are shining brightly. However, oil is in the dogbox, close to 5 year lows at around $56/Bbl. What’s going on?
Crude Oil at 5 Year Lows
Source: Trading Economics
Several factors are driving the price down. Perhaps most potently, the OPEC+ cartel, led by Saudi Arabia, continues to up its production targets at each monthly meeting. Most recently, the cartel agreed at the start of October to boost production by 137,000 barrels per day in November as the member countries (and especially the Saudis) look to regain market share.
At the same time, the volume of oil on board tankers has climbed to more than 1 billion barrels, according to Bloomberg, the highest level seen since 2020, when the pandemic left barrels stranded at sea.
De-escalations in the Middle East have also weighed on prices, as the Trump administration has mediated a tentative peace agreement between Israel and Hamas that, for now, is holding. Peace could see Iran begin to increase its oil output, adding more supply to the market.
In the most recent blow to oil prices, the International Energy Agency said it now expects next year’s surplus to climb to 4 million barrels per day, raising the agency’s expectations from its earlier prediction of 3.3 m Bbl/day. Such an overhang would be equivalent to nearly 4% of the world’s entire demand.
Why haven’t prices dropped even more?
Stockpiling by China throughout the year at levels far beyond the nation’s domestic need has kept prices from falling further, but Beijing’s crude oil purchasing has begun to slow down. Two weeks ago, futures contracts for the US benchmark WTI crude were trading below current rates for the entire year of 2026 – a market condition called “contango” that says traders are expecting an incoming surplus.
The US’s own crude inventories for the week ended 10 Oct rose by 3.5 million barrels per day.
US crude oil production still climbing.
Source: WSJ
In response, the Energy Information Agency is forecasting 2026 WTI prices to average $52 per barrel, far below the typical $60-$62 range considered to be a healthy break-even price for the oil industry.
“Market participants have been sick worried about a crude oil glut for almost a year now,” said Bank of America analysts in a recent note. The long-forecast glut is now beginning to show itself in prices.
The decline is good news for American consumers because cheaper crude means lower prices for gas, diesel, jet fuel and heating oil. US drivers, who were already expected to spend the smallest part of their disposable income on gas in years, are seeing reduced prices thanks to the glut. The average retail prices for regular unleaded gasoline were recently about $3.00 a gallon, about 15 cents less than a year earlier. The Energy Information Administration earlier this month forecast a national average of $2.90 a gallon next year.
President Trump promised lower fuel prices to voters and has spent much of this term dismantling his predecessor’s efforts to foster renewable-energy development in favour of fossil fuels. He has encouraged drilling at both home and abroad (“Drill, Baby, Drill!”) while his trade policies have reduced expectations for global economic growth and thus fuel consumption. Escalations in the trade war between China and the US this month have added fuel to forecasts for slowing economic growth in the world’s two largest economies and therefore weaker oil demand.
But it is an alarming situation for a US oil industry already beset by narrowing profit margins and shedding jobs by the thousands.