HOUSTON — Saudi Arabia is slashing oil exports. U.S. crude oil in storage is dropping. Members of the European Union will soon sharply reduce how much fuel they buy from Russia.
Those developments would normally send oil prices sharply higher. Yet, oil prices have been sliding. The U.S. benchmark, West Texas Intermediate, fell to less than $80 a barrel on Friday from more than $90 at the start of the month.
The global supply of oil appears to be falling, but many oil traders think that demand is heading down even faster. That’s because economic growth is slowing or turning negative in many countries, and use of oil and petroleum products usually plummets in recessions.
The drop in oil prices has helped bring down U.S. gasoline prices, which will be welcome news to many people hitting the road for the Thanksgiving holiday next week. The national average price for gas was $3.71 a gallon on Friday, according to AAA, down from $3.87 a month earlier. Gasoline prices are only a few pennies above where they were when Russia invaded Ukraine in February. In Texas and some other Southern states, gas is now selling for close to $3 a gallon, roughly matching the price from a year earlier.
Analysts say the immediate cause for the drop in oil and gas prices is a growing unease that China will not significantly loosen its Covid lockdown policies because infections are rising again. That will likely keep a lid on the Chinese economy and its need for oil. In fact, shipping data suggests that the number of oil tankers delivering supplies to the country has been dropping in recent days.
China has had an outsized impact on oil prices over the last two decades because it has been the world’s fastest growing large economy, and because it imports most of the oil it uses.
Demand for petroleum products is also weak in Europe, where many economies are growing very slowly or not at all.
The problems in China and Europe are effectively helping to bring down high oil and gas prices in the United States. That, in turn, could help the Federal Reserve’s campaign to bring down inflation.
Some analysts said they expect gasoline prices to continue falling because it takes time for oil price declines to be reflected in the price of fuels made from oil.
“For the second straight day, all 50 states are seeing lower gas prices then a week ago, a trend that will continue on for some time!” Patrick De Haan, head of petroleum analysis at GasBuddy, a company that monitors fuel prices, said Friday on Twitter
Earlier this year, gasoline climbed to over $5 a gallon in much of the country after oil prices jumped by more than 50 percent to over $120 a barrel. Fears that the Russian invasion of Ukraine would upend global markets have eased a bit, but an escalation in the war could easily push prices up again.
It is normal for oil prices to fall over the months of September, October and November after the summer driving season winds down. Demand for fuels normally picks up in December, and this year may be no different.
The U.S. Energy Department projects that the average retail gasoline price this year of $4.02 a gallon will fall to $3.61 a gallon in 2023. That is still nearly 60 cents above the 2021 level when prices were lower in large part because of the pandemic. The department predicts that the global Brent oil benchmark will ease to $95.33 in 2023 from $102.13 in 2022, although that is still roughly $25 above the 2021 level.
The International Energy Agency forecasts that the global oil market, which totals roughly 100 million barrels a day, will slide by 240,000 barrels a day in the last three months of 2022 compared to the same period last year because of the global slowdown. The agency expects that demand will rebound in the first quarter of 2023.
Some major oil producers, including members of the OPEC Plus cartel, have already been reducing supply in response to softer demand. Saudi Arabia’s oil exports have fallen by nearly 500,000 barrels a day this month, and the kingdom will likely press its allies to cut production even further when the group meets on Dec. 4. Last month OPEC Plus moved to support prices by slashing production quotas by a total of two million barrels a day. The decision sent prices higher, but only for a few days.
“OPEC is in a tough spot as they are seeing demand slow for the first time in a couple of years,” said Peter McNally, an energy expert at Third Bridge, a consulting firm.
A potentially more significant change will come a day after the OPEC Plus meeting when European countries will sharply restrict seaborne oil imports from Russia, which normally supplies one out of every 10 barrels used worldwide daily.
Then, on Feb. 5, E.U. members are slated to stop purchasing Russian diesel and other petroleum products. That could have even bigger ramifications because diesel is in short supply in Europe, the United States and many other countries.
No one knows for sure what effect the new European restrictions on Russian energy will have. Many experts expect Russian fuel exports to drop by about a million barrels a day over the next six months.
The United States and Europe are also proposing to cap the price of Russian oil through Western shipping and insurance companies. Many energy experts think the cap will be difficult to enforce and may have limited impact. Russia and buyers of its oil in China, India and elsewhere could find alternative shipping and insurance companies that refuse to adhere to the price cap. Or Russia could retaliate and seek to damage Western economies in new ways.
One policy that has had a big impact is the Biden administration’s decision to release about 180 million barrels of oil from the U.S. Strategic Petroleum Reserve so far this year. Analysts said those releases have served to push down oil and gasoline prices.
But if oil prices keep sliding, the administration could start buying oil to replenish the reserves for use in a future crisis. Such purchases could put a floor under oil prices, and encourage U.S. oil companies to produce more fuel.
So far, however, U.S. companies have been cautious about producing more oil. Domestic production is 4 to 5 percent higher than last year, and the Energy Department expects a similar rate of increase in 2023.