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It wasn’t too long ago that many were talking about triple-digit oil prices, but things have since been going in the opposite direction. U.S. benchmark West Texas Intermediate has now fallen into a bear market, tumbling more than 20% from its last high of $95 at the end of September. A drop of 5% on Thursday to under $73 a barrel cemented the new milestone, setting up oil for its fourth weekly loss, with a combination of factors attributing to its fall from grace.
Too much supply: Swelling inventories and rising U.S. stockpiles are changing market dynamics, with the latest estimates from the EIA far exceeding expectations. There are also growing signs of non-compliance within OPEC+ over the group’s recent production cuts, while a Western price cap meant to dent Russia’s oil revenue has largely failed.
Too little demand: The global economic outlook is weakening, especially in China, which is the world’s largest importer of crude. Refiners there have cut their daily processing rates, suggesting that more clouds and economic headwinds are on the horizon.
Too many premiums: Prices rose in the summer after additional output and export cuts by OPEC+, and were later helped out by fears of war in the Middle East. Those fears have failed to materialize as the conflict appears to be contained to Israel and Hamas, without disrupting oil supplies from nearby regions.
Too little fundamentals: Commodity traders have been laser-focused on key technicals given the speed at which oil broke below $90 and $80 support levels, as well as softness along the oil futures curve. Those pricing patterns saw both WTI and Brent front-month contracts trade in contango and were likely magnified by automated selling systems.
What to watch: The market is looking to the next OPEC+ meeting in Vienna, which will take place a week from Sunday. The group recently forecast that “global oil market fundamentals remain strong,” but that could change as they reconsider extending or deepening their production cuts. Disagreements among the cartel have led to volatile environments and several price wars over the past decade, and there will likely be some difficult discussions this time around to prevent another one from happening.
ETFs: NYSEARCA:USO, NYSEARCA:UCO, NYSEARCA:BNO, NYSEARCA:SCO, NYSEARCA:USL, NYSEARCA:DBO, NASDAQ:USOI, NYSEARCA:NRGU, BATS:OILK, NYSEARCA:USAI