Oil should keep falling, here's why

 

News from the White House caused oil prices to drop Wednesday morning, after the price of this commodity soared earlier this week. The Biden administration issued a statement calling on OPEC + to increase oil production to combat rising gasoline prices in the United States.

According to media reports, the Biden administration told Saudi Arabia, the United Arab Emirates and other OPEC + members that the current OPEC + deal was "just not enough", even if it plans to add 400,000 barrels per day to OPEC + production figures on a monthly basis between August and December.

The White House document also says high gasoline prices threaten the global economic recovery.

The price of gasoline in the United States has increased by about $ 1 per gallon year over year, but OPEC + is not solely responsible for the rise in prices. In fact, oil prices have fallen since the July OPEC + agreement to increase production.

Other factors that have contributed to the recent price hike are:

Inflation;

     A drop in oil production in the United States;

     Gasoline supply bottlenecks;

     The increase in demand for gasoline; and

     The rising cost of ethenol, a gasoline additive that is made from corn in the United States.

 

Oil prices have fallen in response to Mr Biden's demand, although there is no indication that Saudi Arabia, the United Arab Emirates or other OPEC + members are willing to increase production beyond that of their current plan. In fact, oil prices fell this month, even hitting their three-week low on Monday, amid concerns over slowing demand in Asia, especially China.

The market is concerned that the emergence of the Delta variant of the coronavirus may dampen global demand. After OPEC + countries struggled to finalize their July deal, they are unlikely to want to change it just because the Biden administration is worried about the cost of gasoline.

Although OPEC + did not formally respond, two OPEC + delegates told Argus that:

     "The market, as it is, is unlikely to be able to cope with a faster pace of production growth than currently expected."

Gasoline prices are also likely to decline in the fall, as gasoline consumption levels decline after summer highs. Additionally, refineries will begin to perform their seasonal maintenance, and many outside of California will switch to producing cheaper winter gasoline.

Oil prices rebounded from their initial plunge midday Wednesday, but the question remains whether the Biden administration intends to put serious pressure on OPEC + to increase production, or if it is a political gesture intended to show that the White House is trying to do something to combat the rising cost of living that Americans are facing.

However, there are some indications that the Biden team is not very serious in their willingness to put pressure on OPEC +.

     The White House said it had not asked U.S. producers to increase production. It is therefore clear that she does not see the supply figures as a serious problem.

     Unlike its predecessor, Team Biden's foreign policy has not indicated a willingness to pressure countries on seemingly minor issues like this.

     This announcement came from the office of the National Security Advisor, which does not indicate great importance.

Hurricane Watch: We are in the middle of hurricane season. Traders should keep an eye out for an Atlantic storm named Fred. For now, it seems unlikely that it will cause problems for offshore production in the Gulf of Mexico, for transporting oil or for refining. However, tropical storms are unpredictable and the storm is expected to move into the Gulf of Mexico next week.

SAISI