Oil prices experienced a significant drop of nearly 4% on Wednesday, reaching their lowest settlements since June. The decline was fueled by growing apprehensions about global fuel demand, exacerbated by U.S. data revealing a larger-than-expected surge in gasoline inventories.
Brent crude futures settled at $74.30 a barrel, marking a 3.8% decrease, while U.S. WTI crude futures fell to $69.38 a barrel, a 4.1% decline.
Dennis Kissler, Senior Vice President of Trading at BOK Financial, pointed to demand destruction emerging from the fuel side, emphasizing that the current market sentiment is more focused on demand than supply.
Multiple Factors Contributing to Decline
Concerns over China’s economic health further contributed to the downward pressure on oil prices. Moody’s downgrade of China’s A1 rating outlook to negative from stable added to the prevailing worries about future fuel demand.
In the U.S., gasoline stocks surged by 5.4 million barrels, surpassing the anticipated 1 million-barrel rise. U.S. gasoline futures plummeted to their lowest levels in two years. Lackluster demand during the long Thanksgiving holiday weekend, coupled with gasoline demand trailing the 10-year seasonal average by 2.5%, contributed to the overall negative sentiment.
Dollar Strength and OPEC+ Output Cuts
The U.S. dollar reached a two-week high, exerting additional pressure on oil prices by making oil more expensive for holders of other currencies.
While an unexpected fall in U.S. crude inventories occurred, dropping by 4.6 million barrels against the expected 1.4 million-barrel decline, it failed to provide substantial support for prices.
OPEC+ had previously agreed to voluntary output cuts of about 2.2 million barrels per day for the first quarter of 2024. Saudi and Russian officials mentioned that these cuts should prevent a buildup in oil inventories and might be extended or deepened.
Despite these efforts, oil prices have slipped nearly 11% since the OPEC+ meeting on Nov. 29. Russian President Vladimir Putin’s recent discussions with leaders from the United Arab Emirates and Saudi Arabia, focusing on oil and OPEC+, suggest ongoing efforts to address market challenges.
Forward prices for U.S. crude, indicating a steep premium to prompt barrels, underscore concerns about ample supply and growing fears of sluggish demand, painting a challenging picture for the near-term future of the oil market.
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