Economic concerns and high US production lead to oil price drop

Growing fears of an economic slowdown and record high US oil production levels have led to a dropping oil price (Brent) which this week, for the first time since January, dropped below 60 dollars.

Although the oil price is always volatile, analysts foresee that the downward pressure will dominate for the time being and expect the oil price to remain flat in the near future.

Since late April, oil prices have fallen more than 20%. Most analysts cite growing fears of an economic slowdown as the primary reason. The escalating trade war also worries investors, especially now president Donald Trump has threatened to put tariffs on Mexican imports as well.

The New York Times reports that the oil price drop has shocked many investors. Just six weeks ago, some analysts speculated that the oil price would increase considerably following tighter US sanctions on Iran and Venezuela, which are both large producers.

“Everybody is surprised and now doubting projections of global demand growth,” Tom Kloza, global head of energy analysis at the Oil Price Information Service, tells the New York Times. “It’s not as though there has been a rapprochement with Iran. It’s not as though there has been an increase in the rig count in the United States or Canada.”

Tug-of-war situation

The high US production levels also contribute to lower oil prices. “The oil market is again in a tug-of-war situation with downwards pressure currently dominating,” says Bjørnar Tonhaugen, Head of Oil Market Research at Rystad Energy.

While OPEC’s oil output in May was the lowest monthly output in five years, US oil production accelerated to a new all-time high.

Since the start of the year, OPEC together with Russia and other affiliates, also known as OPEC+, have kept oil supply down to boost the market and stabilize prices. According to Rystad Energy’s calculations, OPEC’s 2019 oil production will average 30.3 million barrels per day (bpd), down 1.6 million bpd year-on-year.

Meanwhile, the US is producing oil like never before, reaching a new all-time high last month at a daily production rate of 12.5 million bpd. Tonhaugen expects that figure to rise to 13.4 million bpd by December this year. “Our US supply projections have been revised up yet again. US oil production is already higher than many in the market believe,” Tonhaugen says.

Senior analyst Alfonso Esparza of broker firm Oanda tells Reuters: “Rising US production is more than offsetting the efforts from OPEC+, and if we add the negative effect a trade war could have on energy demand, the result is lower prices.”

Author: Tobias Pieffers

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