Bear Market Strikes Oil: Prices Plunge Amid Supply Glut -

Bear Market Strikes Oil: Prices Plunge Amid Supply Glut

November 17, 2023

Entering a Bear Market

The once-anticipated surge in oil prices to over one hundred dollars has taken a bearish turn. The U.S. benchmark, West Texas Intermediate (WTI), is officially in a bear market, having plummeted more than 20% from its high of $95 per barrel in late September. A remarkable single-day slump saw prices fall by 5%, sinking below $73 per barrel — marking the fourth consecutive week of declines. These losses stem from various market dynamics that are exerting downward pressure on oil prices.

Oversupply in the Market

At the heart of these dwindling prices lies an oversupply issue. Stockpile build-ups and increased inventories in the U.S. have tipped the scales of supply and demand. Recent figures from the Energy Information Administration (EIA) revealed supplies outstripping forecasts, pointing to an excess. Tensions within OPEC+ also contribute to uncertainty as some members reportedly stray from agreed production cuts. Additionally, efforts to implement a Western price cap on Russian oil have yet to make an impact, adding complexity to global supply concerns.

Diminishing Global Demand

A gloomy forecast for the global economy, particularly with China — the leading importer of crude oil — has pushed prices lower still. Chinese refineries are dialing back operations, indicating lesser demand ahead and stoking fears of broader economic issues that could lead to reduced energy use.

Political Risks and Price Inflation

During summer months, geopolitical tensions and OPEC+’s decision to slash production propelled oil prices upward. The fear of conflict disrupting Middle Eastern supplies added a risk premium to pricing models. However, since a wider crisis was averted and supplies continued relatively unhindered, those inflationary risk premiums have waned.

Technical Analysis Overshadows Fundamentals

As WTI prices fell through critical support levels at $90 and $80, traders began leaning more heavily on technical analysis rather than fundamental indicators. The contango evident in near-term WTI and Brent contracts suggests softening demand imminently. This shift could be exacerbated by algorithmic trading systems that are programmed to heighten sell-offs when chart-based signals trigger.

Upcoming OPEC+ Meeting and Market Uncertainties

All eyes are now on OPEC+’s imminent meeting in Vienna scheduled for next week. Despite their reassurance about robust “global oil market fundamentals,” their forthcoming decisions — potentially involving deeper cuts in production — may significantly sway market trends. Past strife within OPEC+ has proven it can cause volatility or even ignite price wars; thus as negotiations loom closer, stakeholders prepare for potential discord that might unleash another bout of instability upon oil markets.

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