Oil prices plunged to their lowest levels in six months on Tuesday, as investors worried about the outlook for the global energy market. The Brent crude oil price, the international benchmark, dropped by more than 4% to $68.5 per barrel, while the US West Texas Intermediate (WTI) crude oil price fell by 2 cents to $68.59 per barrel.
The main factors behind the oil price slump are the rising supply from major producers and the weakening demand from consumers. On the supply side, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) agreed to reduce their output by 2.2 million barrels per day in the first quarter of 2024, but some analysts doubt the effectiveness of the deal in balancing the market. Meanwhile, production is growing in the US, Canada, and Brazil, adding to the global glut of crude oil.
On the demand side, the oil market is facing the headwinds of a slowing global economy, exacerbated by the ongoing trade war between the US and China, the two largest oil consumers in the world.
The US inflation data released on Tuesday showed that consumer prices rose by 0.4% in November, the highest increase since June, fueling the expectations that the Federal Reserve will not cut interest rates anytime soon. Higher interest rates tend to dampen economic activity and oil consumption.
Moreover, the oil market is also influenced by geopolitical tensions in the Middle East and Eastern Europe, which pose risks to the stability of oil supply and demand. The recent escalation of the conflict between Russia and Ukraine over the disputed territory of Crimea has raised fears of a wider war that could disrupt the oil flows from the region. The US and its allies have imposed sanctions on Russia and threatened to take further actions if the situation worsens.
On the other hand, the United Nations passed a resolution on Wednesday calling for an immediate ceasefire in Gaza, where Israel has been conducting a military operation against the Hamas militants since November 14. The resolution was supported by 191 countries, with only the US and Israel voting against it. President Joe Biden warned that Israel was starting to lose international support because of the killing of civilians in Gaza.
According to a report by Reuters, the oil market is also affected by the outcome of the COP28 climate summit, which ended on Wednesday after two weeks of negotiations in Glasgow, Scotland.
The summit reached a historic agreement to phase down the use of coal and other fossil fuels and to limit global warming to 1.5 degrees Celsius above pre-industrial levels. However, some critics said that the agreement was too vague and weak to achieve the ambitious goals.
The outlook for the oil market remains uncertain and volatile, as the supply and demand dynamics are constantly changing. Some analysts predict that oil prices will rebound in the next year, as the global economy recovers from the pandemic and the vaccine rollout boosts the travel and transportation sectors. Others foresee a prolonged period of low oil prices, as the energy transition accelerates and the demand for renewable and alternative fuels increases.
