The details

Oil prices plunged sharply on Thursday, approaching their lowest level in five months, amid concerns that global supply is outpacing demand, despite plans by the OPEC+ alliance to control its production until 2024.

Brent crude, a global benchmark, fell 3.5% to $74.25 a barrel, its lowest level since June. West Texas Intermediate (WTI), the U.S. benchmark, fell 3.2% to $69.20 a barrel.

The declines came after U.S. government data showed another increase in crude oil inventories at the Cushing storage hub, while oil production remained near record levels and gasoline demand fell.

Market spreads, which are widely monitored, point to an oversupply in the near term.

The decline in crude oil – which helped to drive the overall commodities index to its lowest level since 2021 – came despite an agreement reached by OPEC+ last week to deepen production cuts. Prices have fallen by about a quarter from their September peak amid concerns that increased production from outside the group will exceed demand, while there are also speculation that OPEC+ members themselves may not comply with the full restrictions.

Agreement extension

A group of producers from the alliance have made arguments that their latest agreement will continue and could be extended. Saudi Arabia announced earlier this week that the cuts could “certainly” continue after March, and Russia made similar statements. While Algeria and Kuwait have added their voices to this side, oil prices remain under pressure.

Reflecting the current weakness, widely monitored indicators have fallen sharply, with both Brent and WTI in a “contango” state, where futures contracts are trading at premiums above near-term contracts, along the entire curve up to mid-2024. The three-month Brent spread was 18 cents a barrel in contango, while a month ago it was 86 cents in backwardation, the opposite pattern.

EIA data

The U.S. Energy Information Administration’s snapshot of supply and demand raised some eyebrows among market watchers. The numbers showed a decline in exports, despite data tracking ships suggesting strong if not record flows. In addition, the so-called adjustment factor – which is similar to a margin of error – was the largest ever.

Future outlook

It is expected that oil prices will continue to fall in the coming weeks, as global supply faces pressure from increased production from outside OPEC+ and weak demand.

However, it is possible that prices could rise again if OPEC+ begins to implement its production cuts more strictly, or if disruptions occur in supplies from other parts of the world.

Conclusion

The decline in oil prices is a significant development that could have a number of implications for the global economy. It could lead to lower gasoline prices for consumers, which could boost spending and economic growth. However, it could also lead to job losses in the oil and gas industry.

It is too early to say what the long-term impact of the decline in oil prices will be. However, it is clear that this is a development that will be closely watched by policymakers and market participants alike.

Oil Prices Plunge to 5-Month Low on Supply Concerns

Oil Prices Plunge to 5-Month Low on Supply Concerns

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