Is the Recent Dip in Oil Prices Temporary or a Sign of a Peak?

Dip in Oil Prices

Nearby NYMEX crude oil futures prices saw a decline to $63.57 in May, marking a significant drop from their peak at $130.50 in March 2022, which was the highest price observed since 2008. Contributing factors to this 51.2% decline included sales from the U.S. Strategic Petroleum Reserve and economic weaknesses in China.

However, over the past month, oil prices have shown signs of recovery, briefly surpassing $95 per barrel before experiencing a slight pullback. This rally continues to drive prices upward.

The decline of over 51% brought WTI crude oil futures prices to a bottom in May 2023. Notably, crude oil futures have been establishing higher lows and higher highs since May, reaching $95.03 per barrel in September 2023.

In the third quarter of the year, NYMEX crude oil futures increased by 28.52%, while Brent crude oil futures, another leading benchmark, rose by 27.28% from the end of the second quarter to September 29, 2023. These benchmarks also saw substantial gains of 13.12% and 11.08%, respectively, since the end of 2022, reversing the losses experienced in the first half of the year.

While the current trend suggests that both WTI and Brent futures are heading towards $100 per barrel prices, it’s essential to acknowledge that bull markets rarely follow a straight trajectory. Factors such as the weak Chinese economy and the potential impact of rising interest rates and a strong dollar could pose challenges to the upward movement in oil prices. Interestingly, geopolitical considerations have played a significant role in driving oil prices higher, with Russia’s involvement as a key player in OPEC-nonmember discussions.

Despite the overall bullish sentiment, it’s important to recognize that as oil prices rise, the likelihood of periodic corrections also increases.

Moreover, the surge in crude oil prices is stoking inflationary pressures, affecting the overall economy. Crude oil, being a fundamental component in the pricing of goods and services, has contributed to recent increases in inflation indices, and this trend is expected to continue if oil prices keep rising.

As the fall season begins, the peak driving season ends, alleviating pressure on gasoline demand. Gasoline prices, which peaked at $2.9960 per gallon wholesale in July 2023 during the peak driving season, experienced a decline of 5.71%. The seasonal shift in gasoline prices relative to crude oil prices reflects the typical trend at the end of the driving season.

In contrast, heating oil, a distillate fuel, which serves as a proxy for diesel and jet fuels, witnessed a robust rally of 34.85% in Q3, accompanied by a 48% increase in the heating oil crack spread.

Looking ahead, oil is expected to become a significant topic of debate during the 2024 U.S. Presidential election. Republicans are attributing high fuel prices and increasing inflation to the Biden administration’s energy policies, which have emphasized alternative and renewable fuels while curbing fossil fuel production and consumption. This shift in energy policy has stirred controversy, with many opposing politicians claiming it has granted pricing power to the international oil cartel and Russia.

The future of U.S. crude oil and fossil fuel production and consumption is set to take center stage in the upcoming 2024 Presidential election. As the contest unfolds, any continued bullish price action in the crude oil futures market, pushing prices beyond the $100 mark, is likely to intensify the debate.

It’s worth noting that as of early October, the U.S. Strategic Petroleum Reserve had dwindled to 351.30 million barrels, marking a forty-year low. This decline of 41.5% from November 2021 levels leaves the administration with limited tools to influence oil prices in the coming weeks and months, particularly since the Department of Energy did not replenish the reserve when oil prices fell within its target buying zone of $67-$72 earlier this year.

Despite a minor morning drop of over 3% in oil prices driven by demand concerns, the prevailing odds favor a continuation of the oil rally, exerting further upward pressure on inflation. While prices retraced from the $90 level, the likelihood remains high for another higher low in the near future.

Featured Image: Freepik @ ruslan23-02

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