The oil market
The oil price has returned to levels last seen prior to Russia’s invasion of Ukraine in February 2022. This reflects the decline in demand due to the high prices of petroleum products reached in 2022, the weakness of the global manufacturing sector, and changes in consumer habits after the pandemic.
However, prices remain sufficiently high to incentivise production in non-OPEC+ countries,1 including the US, which in 2023 will see its highest annual production ever, exceeding 12.3 million barrels per day (mbd). Therefore, since the beginning of 2022, the oil market has seen an excess of supply over demand of around 0.5 mbd, which has weighed on prices.
This excess supply has persisted despite the efforts of the OPEC+ cartel, led by Saudi Arabia and Russia, to rebalance the market by reducing production. The latest cuts, announced in April, June and July of 2023, reduced production quotas by a total 2.66 mbd, or almost 3% of global supply. The failure of OPEC+ to push oil prices higher further undermines its credibility as a market stabiliser.
At the same time, the cartel’s strategy of cutting production to increase prices risks being self-defeating. High oil prices support production outside the cartel and accelerate the transition to renewable sources of energy, creating the conditions for a longer-lasting excess supply of oil. In this context, only a significant recovery of the global economy could rebalance the market in the next few months and support significantly higher oil prices, although this seems unlikely.
The natural gas market
The collapse in the price of natural gas was as spectacular as its surge from mid-2021 to August 2022. In Europe, after exceeding EUR300 per megawatt hour (MWh) last year, the price has dropped close to EUR25 MWh, a manageable level albeit at the high end of the pre-pandemic range.
The drop in European natural gas prices reflects a 24% reduction in local consumption in the first half of 2023 compared to 2021 and the diversification of suppliers to replace imports from Russia after the invasion of Ukraine. As a result, in early July EU natural gas storage was at 80% of capacity, much more than in the same period over the last two years. High storage capacity implies that a daily pace of accumulation of less than half that of the April-June period will be enough to achieve the target of 95% of capacity at the end of October. The resulting moderation of natural gas demand from Europe will help keep prices low globally.
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