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Analysis Energy

Oil price drops due to Russian oil production

May 23, 2024 - Matthijs Bremer

The oil price has dropped significantly this week, after several price-depressing factors came together. Russia produced more oil than agreed within OPEC+ at a delicate moment. Additionally, the policy of the American central bank (Fed) is not favorable for the oil market, and American reserves continued to increase.

The oil price keeps falling. On Thursday, May 16, oil was traded at $83.27 per barrel. The price rose to the highest point of the week the next day. On Friday, May 17, oil was traded at $83.98 per barrel. On Thursday, May 23, the oil price was significantly lower, $81.50.

An important reason for the lower oil price is that Russia exceeded the OPEC+ standards. According to the Russian government, there is a technical reason behind it, and the country will quickly submit a proposal to OPEC to rectify the situation, as stated by the Russian Minister of Energy, Aleksandr Argejev, in the Russian media. The overproduction comes at a painful moment, as Russian Deputy Prime Minister Alexander Novak hinted at higher oil production two weeks ago. Additionally, there was a discussion within the cartel last week about production volumes. Five of the 22 countries have expressed support for higher targets. The Russian overproduction could serve as an argument for countries in favor of increased oil production.

New interest rate hike?
The pressure on the oil price increased significantly on Wednesday, May 22, after the Fed released the minutes of its meeting. It can be read in the minutes that the path to an American interest rate cut takes longer than expected due to disappointing inflation indicators. The minutes even mention discussions on whether the economy is being sufficiently slowed down to combat inflation. Several officials have expressed doubts about this. In the market, this discussion is seen as a possible prelude to a new hike.

However, it is far from certain that the Fed will proceed with another interest rate hike in the face of persistent high inflation. At the same time, there is also a question of whether the hikes are having sufficient impact. The minutes suggest that higher rates are having less effect on the economy, as companies and consumers fixed their loan rates when money was virtually free. This weakens and slows down the impact of high rates. This is an argument against a new hike, as the decline in inflation is mainly a matter of time.

American oil reserves
Furthermore, the imbalance in the American oil market continues to be a concern. Since the sharp drop in American commercial oil reserves, the inventories have increased significantly again. This is evident from data from the American Energy Agency (EIA). This week, the reserve increased by 1.83 million barrels. The market expectation was an increase of 2.55 million barrels. It is noteworthy that American distillate inventories have also risen. So far, an overproduction of crude oil combined with an underproduction of fuels has led to inventory growth. Currently, the overproduction of oil is so significant that the higher distillate production cannot offset the oil production.

The diesel price does not move in parallel with the oil price and takes a slight upward turn. On Thursday, May 16, it was €126.89 per 100 liters. For most of the week, the diesel price increased. On Monday, May 21, the diesel price reached €128. On Wednesday, May 22, the price dropped to €127.34.

Matthijs Bremer

Matthijs Bremer is a market specialist in pork, beef, and poultry meat at DCA Market Intelligence. He also monitors the protein transition, keeping an eye on developments in cultured meat and meat substitutes.
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