WTI crude oil has recently dropped to around $68 per barrel, marking a 13% decline in just over a week. This is partly driven by China's shift from diesel to liquefied natural gas (LNG), cutting diesel demand by 800,000 to 1 million barrels daily, as 30% of new trucks now run on LNG. The market is also oversupplied, and geopolitical risk premiums are minimal.
The Organisation of the Petroleum Exporting Countries’ (Opec) reluctance to boost production and an oversupply of natural gas have put further downward pressure on oil prices. The near-term outlook for oil could remain negative unless geopolitical tensions rise, or the global economy suddenly surges.
US election and oil prices
While the western hemisphere holds significant untapped oil and gas reserves, political challenges, not geological or financial ones, are the main obstacles to realising the full production potential of these reserves. However, the impact of the US presidential election on oil prices and the energy sector is currently unclear.
Victory for former president Donald Trump could lower energy prices and inflation by increasing drilling and easing regulations, which may hurt oil investors in the long run. Conversely, a victory for vice-president Kamala Harris could drive up energy prices and inflation due to stricter regulations on fossil fuel production.
Opec under threat
Opec's influence on global oil prices is in danger of waning, as more countries adopt new technology and boost independent production. Venezuela's potential is especially critical; if it aligns with the US and increases production, it could significantly expand supply and challenge Opec's control.
It could also be argued that Opec underestimated the resilience and growth ambitions of US shale companies, which sacrificed shareholder capital to boost production. This aggressive growth mindset could further erode Opec's influence on global oil markets.
In the US, falling oil prices are less harmful because the economy benefits from a robust downstream manufacturing sector and a strong tech industry, with this diversification making the US tax base less reliant on oil revenue than petro-states like Saudi Arabia or Iran. Lower energy prices may even boost tax revenue by benefiting other industries, potentially making low oil prices less damaging to the US than to Opec nations.
What’s next for oil prices?
The medium-term outlook for the oil sector is unfavourable, due to factors like potential shifts in Chinese policy, recession fears, a possible Trump victory, and ongoing geopolitical struggles in the Middle East.
All in all, the potential headwinds currently outweigh the tailwinds, which could make the next six-to-nine months difficult for the energy sector. The US election, however, could be a key turning point.
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