Despite geopolitical tensions in the Middle East, oil prices remain relatively low. These 3 factors explain why.
On September 27, 2023, Brent crude oil closed at $96.55, the year’s highest level. Many were sure oil prices would break the $100 per barrel psychological mark, sending shock waves across the system. Instead, oil prices quickly dropped, only slightly rebounding after Hamas’ October 7th attack, and falling to $73.24 in mid-December.
The Middle East is still embroiled in tensions. From Israel reaching the Rafah border crossing in Gaza to the Houthi rebels disrupting Red Sea shipping, oil prices should rally non-stop. And yet, Brent remains around the $80 mark, closing 1.5% lower on Monday. WTI Crude is traded even lower, currently at around $77 per barrel.
What is causing oil prices to remain low? Especially after three years of constant geopolitical tensions? There are three main factors to consider.
Demand issues
The International Energy Agency (IEA) published a report last week saying oil demand will rise by 1.22 million barrels per day in 2024. This represents a significant drop from last year, as well as a direct contradiction to OPEC’s own report.
The Organization of Petroleum Exporting Countries (OPEC) expects oil demand to grow by 2.25 million barrels per day, 1 million more than the IEA’s forecast. Moreover, the IEA expects oil demand to peak by 2030, while OPEC predicts constant growth for the next 2 decades.
Coincidentally, OPEC slashed production by 1 million barrels per day last year, artificially driving up prices. Now, however, it seems the slash in production was still not enough to threaten global demand.
China, the world’s largest buyer of oil, keeps pumping up its renewable and nuclear energy output. While that may not be for the love of the environment but rather a lack of natural resources in its territory, it’s still terrible news for OPEC countries.
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US record production
Another factor keeping crude prices (especially WTI) down is the record production of oil by the United States. Thanks to the Shale Revolution, the US became the world’s largest oil producer, outpacing even Saudi Arabia and Russia.
Under the Biden administration, the US cranked up oil production to meet internal demand and counter OPEC’s price sabotage. Nearby Canada, whose oil reserves are comparable to Russia’s, also increased exports to the United States.
This level of production cannot be sustained forever. Experts agree the US will run out of oil reserves in the 2030s if it maintains the current extracting pace. However, for the time being, it helps drive global crude prices down.
Russian oil mudding the water
Finally, despite Western sanctions, Russian oil keeps circulating in the market, increasing the global offer and reducing the price.
Russia managed to export oil thanks to the collusion of China and India. The latter, a close US ally, is now a crucial Russian commercial partner. Russian oil is exported to India where it’s refined locally and sent all across the globe. CNN estimates that around $1 billion in Russian oil ended up in the United States.
Both China and India purchase Russian oil at a bargain. While the G7 price cap of $60 is long breached, the two Asian giants buy oil from the Kremlin at around 20% below the global price.
Ironically, it was Russian oil that started the Western energy crisis, and it is now Russian oil keeping prices at bay.
