After years of high oil prices and OPEC+ controlling the market, Big Oil could be on the verge of a major downturn. The Brent crude benchmark recently dipped below $70 per barrel for the first time in three years. This week, the International Energy Agency (IEA) warned that oil prices may continue to fall.
Fatih Birol, head of the IEA, explained, “With weak demand and more oil coming from non-OPEC countries, mainly the U.S. and others, there could be downward pressure on prices.”
Oil prices surged after Russia’s invasion of Ukraine led to widespread energy sanctions, tightening global crude supply and giving OPEC+ significant control over the market. But according to a report from the Financial Times, “traders and speculators have shifted their outlook in recent weeks due to fears of slowing growth in China and the U.S. This prompted OPEC to delay plans to reverse more than 2 million barrels a day in production cuts.”
A key factor in this slowdown is China’s declining oil demand, Birol noted. “Over the past decade, about 60% of global oil demand growth came from China. Now, the Chinese economy is slowing,” he said. After years of rapid growth, China is grappling with a housing crisis, high debt, weak consumption, and rising unemployment, especially among its record 11.9 million recent graduates.
This poses a challenge for Big Oil. For the past three years, major oil companies have rewarded shareholders with significant payouts. Bloomberg reports that ExxonMobil, Chevron, Shell, TotalEnergies, and BP plan to repurchase over $16.5 billion in shares this quarter alone, which amounts to $66 billion annually – about 5.5% of Big Oil’s combined market value.
However, investment bank Jefferies Financial Group is sounding the alarm. With oil prices falling, about half of international oil companies may struggle to sustain these payouts without taking on more debt. The drop in prices is testing the resilience of these firms, many of which may not emerge from this downturn unscathed.
OPEC’s strategy of withholding supply to boost prices and revenues for its 23 members is also being called into question. Recent efforts to delay supply increases have failed to raise prices, with the Brent benchmark now at a three-year low. Wall Street is beginning to speculate whether OPEC and its allies might reverse course and increase production, sparking a market-share war.
India, the world’s third-largest oil importer and consumer, is urging OPEC to take such action. India wants lower fuel prices to meet rising domestic demand. As China’s influence in the oil market wanes, India’s role in shaping oil demand is growing. According to the IEA, “With China falling behind its forecast, other Asian countries will become increasingly important for oil demand growth.”
OPEC, however, remains more optimistic than the IEA. While the IEA expects global oil demand to grow by 903,000 barrels a day this year, OPEC forecasts a much higher growth rate of 2.03 million barrels a day this year and 1.74 million barrels a day in 2024.