Oil costs plummet to four-year minimum due to OPEC+ boosting production output.
Layman's Guide to the Plunging Oil Prices in 2022
Oil prices have taken a nose dive to a four-year low, sending shivers down the spines of investors and oil giants alike. So what's the deal?
Well, oil-rich countries like Saudi Arabia have been pumping out oil like there's no tomorrow, thanks to OPEC+, the world's leading oil cartel. Over the weekend, OPEC+ decided to up production by another 411,000 barrels a day, starting June.
This move runs counter to the efforts of recent years to sustain higher prices through deep production cuts. Oil analyst David Morrison of Trade Nation said, "It's a sharp contrast to what we've seen over the last couple of years."
The primary push for this production surge came from none other than Saudi Arabia. They've been threatening to keep the pedal to the metal if other members don't rein in their own oil production. Pepperstone's Chris Weston said the alliance is "clearly fractured."
The push in production has come faster than traders anticipated, adding even more pressure on oil prices, which had already been on a downward spiral. The fallout from US President Donald Trump's trade war certainly didn't help, with oil prices dropping from around $75 to $65 in 'Liberation Day' week due to fears of a slowdown in global economic growth.
Following the news from Saudi Arabia, oil prices dipped as low as $58 and currently sit at $60.33, the lowest point since February 2021. Goldman Sachs promptly downgraded its price forecasts, now expecting Brent crude to average $60 a barrel for the rest of the year, down from $63 earlier.
However, the depreciation of the US dollar against the pound has made the oil price drop even more severe in sterling terms, with oil falling 30% since January. Shreyas Gopal of Deutsche Bank noted that lower pump prices could have a significant impact on real disposable income for consumers in the UK.
London-based Shell has been named the "most resilient to price fluctuations" among global oil giants, thanks to its ability to break even if Brent prices fall to $65. Analysts expect Shell's buybacks to remain strong at $14 billion this year, while projecting a 55% decline in share buybacks from rival BP, expected to purchase only $3 billion in shares by 2025.
Rumors swirled over the weekend that Shell might be weighing a takeover bid for BP after BP underwent major strategic overhauls to wind down its investments in renewable energy.
In brief, increased production from OPEC+ tends to lower oil prices, and this situation was no different in 2022. However, there were other factors at play, such as the recovery from the COVID-19 pandemic, international conflicts, and sanctions on major producers, making the market volatile. For a more detailed analysis of 2022's events, additional historical data would be necessary.
- OPEC+, the world's leading oil cartel, has increased production limits, contributing to the downward trend in oil prices in 2022.
- Analyst David Morrison of Trade Nation observed a sharp contrast in production strategies, as OPEC+ has been pumping out more oil compared to the recent years' efforts to maintain higher prices.
- The average oil price predicted by Goldman Sachs has been downgraded, now expecting Brent crude to average $60 a barrel for the rest of the year, due to the increased production.
- The finance industry is closely monitoring the oil-and-gas industry, as lower oil prices could impact consumers' real disposable income, according to Shreyas Gopal of Deutsche Bank.
- London-based Shell, considered the most resilient to price fluctuations among global oil giants, might be considering a takeover bid for BP, according to weekend rumors, as BP undergoes major strategic overhauls to wind down its investments in renewable energy.
