Why are oil prices not rising, even though the quantity is becoming extremely scarce? A classification From refugee to mayor – the crazy story of Ryyan Alshebl

The association of oil-producing countries has had little reason to be happy recently, because the prices for the oil they produce have only gone in one direction over the past year: down. And this despite the fact that there is less and less promotion.

The development of the oil price has a major impact on the world economy, but often also reflects the state of the economy. And this currently seems to be the explanation why Saudi Arabia & Co. apparently failing to drive up the prices of their “black gold” again.

Who is OPEC+?

OPEC+ consists of more than 20 oil-exporting countries, including Saudi Arabia, Russia, Mexico, the United Arab Emirates, Iraq and Iran, and seven African countries. Together they pump more than 40 percent of the crude oil produced from the ground.

Because its members agree on the production volume, OPEC+ is regarded as a cartel with the aim of counteracting price formation on the world market and thus being able to influence prices themselves.

Why would oil prices rise?

After the outbreak of the Russian offensive war in Ukraine, crude oil prices rose to record highs. In March 2022, a barrel of crude oil cost more than $100, and peaked at $112 in June. Since then, however, the situation has eased and the price has continued to fall.

The OPEC+ countries want to counter this trend and have cut production volumes again and again since November, most recently in April there was a comprehensive OPEC+ agreement to limit production volumes until 2024. And this week Saudi Arabia and Russia, among others, announced a further reduction in their production.

The announced production cuts thus amount to more than five million barrels per day – equivalent to about 5 percent of global oil production.

In addition, Saudi Arabia decided this week to immediately tighten prices in addition to volumes. The country made its crude oil supplies to Europe and the Mediterranean significantly more expensive, while simultaneously increasing delivery costs to Asia. This decision came as a surprise, especially as the kingdom risks falling oil demand from the kingdom.

All this led to a slight price increase of around two dollars per barrel in the first week of July. Under the circumstances, however, this is much too stable and is around $75 per barrel well below OPEC+’s target of $80 per barrel.

Why aren’t oil prices (really) rising?

1. Not all members comply

It happens again and again that not all OPEC+ countries adhere to the agreements of the association – after all, their own political and economic goals do not always coincide with those of the other OPEC+ countries.

This year Iran is the “renegade”: the country, which is suffering heavily from the sanctions, has expanded its oil sector since 2021 to strengthen its own economy. While Iran produced about two million barrels a day in 2020, it is almost three million this year. China in particular is showing a growing willingness to buy Iranian oil.

In addition to the member states, the US is also thwarting OPEC+: according to the Wall Street Journal, 2023 could be a record year, with more oil production in the US than ever before.

2. Falling demand and recession fears

In China in particular, economic output is currently lagging behind expectations. Data from the world’s second-biggest oil consumer raises fears the economic recovery may lose momentum following the lifting of coronavirus restrictions.

In addition, a recession is imminent in Europe: the industry in particular is currently sending negative signals. This after it became clear a few weeks ago that the eurozone was already suffering from technical inflation with two quarters of negative economic output. And also in the US there is talk of an imminent “mild recession”.

Negative economic performance does not bode well for oil-exporting countries: lower production means less demand for oil products.

3. Fear of interest

In addition, leading central banks, including the US Federal Reserve, are warning of further interest rate hikes to combat stubbornly high inflation. Higher interest rates tend to reduce consumers’ disposable income and can lead to less money being spent on car rides and travel. That would also further limit the demand for oil.

Higher interest rates also drive up costs for manufacturers in the manufacturing sector. And data is already pointing to a slowdown in the industry: The manufacturing sector has already contracted in Japan, the eurozone, the UK and the US over the past month, while it slowed in China over the past month, an analyst told Reuters.

In addition to poorer sales, such a situation leads to another fear for the OPEC+ countries: market speculation. If investors assume that the oil price will continue to fall – due to falling demand – they are betting on it. That, in turn, would push prices down further.

While Saudi Energy Minister Prince Abdulaziz bin Salman repeatedly warned traders not to bet on falling oil markets, investors are unimpressed: Markets continued to show “bearish signs” — signs that prices, at least, won’t rise any time soon — according to the “Wall Street Journal”.

What about natural gas prices?

As with crude oil, natural gas prices have also fallen – or normalized – sharply this year. Today, gas costs about 30 euros per megawatt hour – again about the same as before the bottlenecks created by the Russian offensive war. In comparison, at the peak in 2022, a megawatt hour cost almost ten times as much.

Here, too, it does not look as if prices will rise sharply again. The reason is, among other things, the well-stocked storage facilities in Europe after coming through the winter unscathed. In two months, these could even “reach the limits of their capacity, so prices are likely to fall further this summer,” an analyst told the Bloomberg newspaper.