Why oil prices are dropping this summer

The financial world is watching for further contentiousness between United States and Chinese negotiators, as oil traders fear a potential global economic slowdown. Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) is trying to push oil prices higher.

There was a time when OPEC would have been able to do that. However, the oil markets are facing several supply disruptions and yet the price is dropping.

As OPEC prepares to meet at the end of this month and hopes to prop up the price of oil, we can thank U.S. oil production for the lower prices. Because of the 12.4 million barrels per day the United States is producing — more than any other country in the world right now — traders are actually pushing down the price rather than driving it up to four-year highs.

A recent drop in oil prices has left OPEC confused. As the Saudi oil minister Khalid al-Falih said last week, the price volatility seen in oil recently is “unwarranted.” In fact, if the market followed only the news about global oil supply, the price of oil would be rising over the last few weeks, not dropping precipitously as it has.

Just in the past month we have seen Iranian oil exports fall to near zero and Venezuelan production plunge below 800,000 barrels per day. At the same time, according to officials, Libyan production could “collapse at any moment,” Kazakhstan’s largest oil field was mostly offline for maintenance and Russia has been suffering from an oil contamination problem. Production from OPEC member nations actually dropped to a four-year low in April. This news would typically signal the market to raise oil prices.

But that’s not happening, in large part because U.S. production has fundamentally changed market perception. Oil traders and the oil market have ignored any news that would send prices higher and instead responded only to fears of an economic downturn and potential resulting decrease in oil demand. WTI, the U.S. oil benchmark, fell over 20 percent from April 23 to June 5. Markets have decided that there is enough oil supply, regardless of what happens in Iran, Venezuela, Libya and Russia. This is largely because of record production from the United States. 

OPEC and its partner countries, such as Russia and Kazakhstan, want higher prices. OPEC+, as the combined group is called, will be meeting within the month to discuss their strategy for the next six months. They may continue or increase production quotas from the past two and a half years, in hopes of raising the price again.

If U.S. production was not so robust, OPEC+ would be able to manipulate the market to prop up the price, perhaps even to triple digits. However, the U.S. supply significantly complicates the matter for OPEC+ and has left the market confident in supply numbers. Even if oil production from OPEC+ continues to fall, the perception remains strong that global supply is plentiful, thanks to U.S. oil.

Typically, as we approach an OPEC meeting with low oil prices, markets start to anticipate and prepare for a jump in oil prices based on OPEC’s decision. In fact, there is already talk that OPEC might try to cut production to prop up oil prices. But we aren’t seeing the price of oil rise in response to this news like we usually would. It is possible that oil prices might temporarily spike in response to a decision by OPEC at the end of the month, but we should not worry about a large jump and long-term higher repositioning of oil prices.

Today, OPEC is incapable of altering the supply of oil enough to shock prices significantly higher. The events of the last two months have demonstrated that, despite OPEC’s production decreases, U.S. oil production is simply too strong for the market to worry much about OPEC’s decisions.

This spring and early summer, we are seeing oil prices drop because strong U.S. production has given oil traders an excuse to focus on issues like a trade war with China or a potential global economic recession instead of OPEC and Russia.

Ellen R. Wald, Ph.D., is a senior fellow at the Atlantic Council’s Global Energy Center as well as the president of Transversal Consulting, a global energy and geopolitics consultancy. She is the author of “Saudi, Inc.,” a history of Aramco and how the Saudi royal family controls this multitrillion-dollar enterprise.