Why Oil Prices Are Falling Currently

Last Updated: 7. Dezember 2023By

In the 1970s there was still the so-called „oil price weapon“ which was used in the war of the Arab states against Israel. In the fall of 1973, the Arab oil states reduced oil production and imposed an embargo to harm Israel’s supporters, namely the US and European countries. The reduced production levels led to a shortage of supply, driving up prices. This in turn harmed the economy of the West.

After the Hamas attack on Israel, fears initially arose that the oil price could once again explode, as it had in the 1970s, but the opposite is currently the case.

Has the oil price weapon become obsolete? Last week, OPEC+ met online and announced further cuts in oil production. Oil giants Saudi Arabia and Russia want to maintain the existing cuts of 1.3 million barrels per day until March. In addition, there are now to be further restrictions. It is about a reduction of 700,000 barrels additional in the next quarter by six OPEC+ states.

The announcement alone should have led to a price increase, but this did not happen. The day before the meeting, the price of North Sea crude oil had already fallen by around two dollars per barrel. After the agreement to cut production, prices typically fell further. On the last day of the week, a barrel (159 liters) of North Sea Brent cost $80.68. That was 18 cents less than the day before.

Ask yourself why the oil price is falling despite an announced shortage of supply? According to tagesschau.de, market observers doubt the determination of the OPEC+ states. In addition, doubts are being expressed about the agreement.

Market expert Robert Rethfeld of Wellenreiter-Invest warned on tagesschau.de that Russia’s commitments should be taken with caution. In addition, the restrictions were agreed upon on a voluntary basis. Angola has therefore already rejected its quota. This is not the first time. Agreements on production volumes have frequently not been observed in recent times.

The loss of credibility occurred because the press conference that was to take place after the online meeting was cancelled.

What speaks against an increasing oil price What also speaks against an increasing oil price is the flourishing oil production in the US. This is at an all-time high of 13.2 million barrels per day thanks to fracking and experts believe that further increases in production are possible. The shortage from OPEC+ could therefore be easily compensated for or even exceeded by the US oil production.

In addition, it is likely that oil demand will decline in the coming months because the economy is weak in many countries and a global recession is looming. The United States and China, the largest oil consumers, are expecting sluggish growth, so demand for oil is likely to decline. There could even be an oversupply.