Oil Prices Plummet to Five-Month Low Amid Dollar Strength and OPEC+ Skepticism

Oil prices took a steep dive to a near five-month low on Tuesday, marking the fourth consecutive day of declines, as concerns about global demand and the strength of the U.S. dollar overshadowed last week's announced voluntary supply cuts by OPEC+.

Brent crude oil futures fell 1.1%, or 83 cents, to settle at $77.20 a barrel, while U.S. West Texas Intermediate crude (WTI) ended 1.0% lower, down 72 cents, at $72.32. These figures reflect the lowest close for both benchmarks since July 6, with WTI experiencing its first four-day decline since May.

Reuters notes that market sentiment appeared unswayed by the recent OPEC+ agreement, which included voluntary output cuts of approximately 2.2 million barrels per day for the first quarter of 2024. Analysts note that the voluntary nature of the deal, particularly the extension of existing cuts by Saudi Arabia and Russia, left traders questioning its effectiveness.

Craig Erlam, senior market analyst at OANDA, expressed skepticism, stating, "The OPEC+ deal did little to support prices and given the (four) days of declines that followed it, traders are clearly very unimpressed."

Russian Deputy Prime Minister Alexander Novak's assurance that OPEC+ is prepared to deepen production cuts in the first quarter of 2024 did little to assuage concerns. Fiona Cincotta, financial market analyst at StoneX, noted, "The voluntary element of the deal left the markets questioning whether the supply reduction would actually come into effect."

Meanwhile, President Vladimir Putin's visit to OPEC members in the United Arab Emirates and Saudi Arabia, coupled with hosting Iranian President Ebrahim Raisi in Moscow, underscores ongoing diplomatic efforts amid dwindling oil revenues.

The slump in oil prices is further exacerbated by rising U.S. crude oil and fuel inventories, according to American Petroleum Institute figures. Crude stocks rose by 594,000 barrels in the week ending December 1, with gasoline and distillate inventories also witnessing increases.

China, the world's leading oil importer, faces its own economic challenges, as state-owned banks work to stabilize the yuan after Moody's cut the country's outlook to negative. Moreover, at the COP28 climate conference, discussions are underway to call for a formal phase-out of fossil fuels as part of the United Nations summit's final deal to combat global warming.

The strength of the U.S. dollar, hitting a two-week high against a basket of currencies, is impacting oil demand globally, making the fuel more expensive for buyers using other currencies. With signs of a slowing labor market and subdued inflation, market expectations point towards a potential rate cut by the Federal Reserve in mid-2024, adding another layer of complexity to the intricate web of factors influencing oil prices.