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Analysis Energy

Oil price reacts strongly to OPEC move

June 6, 2024 - Matthijs Bremer

The price of oil has dropped significantly this week. The price decreased sharply after the oil cartel OPEC+ announced its new policy. Additionally, there appears to be an oversupply of oil due to an imbalance between supply and demand.

The oil price has taken a significant step downwards. On Thursday, May 30, oil was traded at $81.86 per barrel. By Tuesday, June 4, the oil price had dropped significantly, reaching $77.52 on that day.

The decline in the oil market was initiated after the meeting of the oil cartel OPEC+. Initially, there seemed to be little reason for this, as the cartel decided to maintain the voluntary supply constraints. Since 2022, the cartel has reduced its production targets by 5.86 million barrels per day. According to the countries, the demand is still too low to increase supply.

Despite the market initially expecting OPEC+ to maintain the lower targets, the market found its way downwards because the cartel opened the door to higher targets. Under the current agreements, the targets will remain 3.66 million lower until the end of the year, and the reduction of 2.2 million barrels per day will continue until September. The reduction of 2.2 million barrels will be phased out between October 2024 and September 2025. Although various countries reportedly objected to the low targets, the market expected OPEC+ to maintain them. Therefore, it was surprising that the cartel accommodated the dissenting countries. The market expects an additional 500,000 barrels per day to be available in December.

American market remains imbalanced
Furthermore, the American oil sector continues to struggle to balance its reserves. After a significant decrease of 6.5 million barrels last week, commercial reserves increased by 4 million barrels again, according to data from the American Petroleum Institute API. The leading weekly survey by Reuters indicated that experts had expected a decrease of 1.9 million barrels in oil reserves.

Due to the situation where supply predominantly exceeds demand, American traders are reconsidering their positions in the oil market, as reported in American economic media. The structural overproduction of oil has lowered confidence in demand. Additionally, anonymous traders told CNBC that Asian demand is much lower than initially expected. All these factors lead traders to believe there is an international oversupply. However, it remains uncertain whether prices will stay this low. Typically, oil demand increases in the summer due to more air travel during that period. The market's expectation is that the surplus of oil will eventually find a buyer.

The diesel price followed the oil price and dropped significantly this week. On Thursday, May 30, diesel was traded at €127.22 per 100 liters. By Tuesday, June 4, the price had decreased to €123.34. The price has since risen slightly to €124.08.

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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