OPEC has slashed crude oil production twice in the past three months. But despite production cuts, oil prices have continued to slide. Why? It comes down to two words: weak demand.
Global oil demand has been weak for three reasons.
First, cars are becoming more fuel efficient. The average car in model year 2004 got 19.3 miles per gallon. By contrast, the average car in model year 2022 got 26.4 miles per gallon. Each year, the average car uses 1.75% less fuel than the year before, meaning that, collectively, people would have to drive 1.8% more each year just to keep global demand stable.
However, rather than driving more, people appear to be driving less. Americans, for example, are still driving 2.6% less than they did before the pandemic.
And weak demand isn’t just an American phenomenon. Look at China. From 2000 to 2022, China’s consumption of crude oil grew from 4.7 million to 15.6 million barrels per day, making the oil markets extremely sensitive to fluctuations in the pace of Chinese growth. But so far in 2023, Chinese growth has disappointed expectations, and oil prices tend to follow China’s growth rate with a lag of about one year.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
