For the past two years, West Texas Intermediate (WTI) crude oil prices appeared to have a solid floor at $64 per barrel. However, in early April, WTI broke through this support level, falling to a four-year low of $56 per barrel.
The recent decline in crude oil prices is driven by three primary factors:
- Slowing Growth in China: Since 2005, there has been a notable relationship between Chinese economic growth and crude oil prices – when Chinese growth peaks, crude oil prices tend to peak about a year later. China's growth rate peaked in 2021, and crude prices followed suit, peaking in 2022.
- Increased U.S. Production: U.S. crude oil production has surged to 13.5 million barrels per day, adding significant supply to the global market.
- Improved Fuel Efficiency: Over the past two decades, vehicles have become increasingly fuel-efficient. On average, cars now use about 2% less fuel per unit of distance driven each year compared to the previous year.
These factors have collectively made it challenging for crude oil prices to sustain a significant rally.
OPEC's Role and Historical Context
Over the past few years, the Organization of the Petroleum Exporting Countries (OPEC) has cut production by 3.5 million barrels per day, with the majority of these cuts coming from Saudi Arabia. If Saudi Arabia decides to increase production, WTI prices could face further downward pressure.
Historical precedents highlight the potential impact of such a move. In late 2014, when Saudi Arabia boosted production, oil prices dropped from $90 to as low as $25 per barrel. Similarly, in 1985, Saudi Arabia increased production from 6 to 10 million barrels per day, causing oil prices to fall from $32 to $12 per barrel – a 70% decline.
If Saudi Arabia opts to prioritize market share over price support, WTI prices could decline even further. Additionally, tariffs could slow global demand.
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