The oil price is currently at its lowest point in almost two months. The price drop is mainly a response to the growing number of Covid infections in China. On Monday, China took their long-feared decision to put the largest district of the megacity of Guangzhou in lockdown. Due to the impact of this decision, the oil price briefly dipped below $85 just like at the end of September. Analysts fear that OPEC+ will respond to the low prices with a drop in production.
After the major price drop between November 15 and 18, the oil price fell even further this week. On Friday, October 18, Brent oil still cost $87,62. By November 22, the price had risen slightly to $88,36. On Thursday, November 24, the price even fell below $85. This put the price at its lowest level since the end of September. By the morning of November 25, the price had corrected slightly to $85,51.
The decline in the oil market appears to be mainly the effect of the rising number of corona infections in China. The Asian country still has a zero-covid policy. For example, citizens who are found to be infected with the virus must spend part of their quarantine period in an isolation hotel.
Initially, China tried to control the large number of infections with a large-scale testing program. Residents of neighborhoods with a large number of infections are tested daily. However, this testing strategy proved insufficiently effective in Guangzhou. That is why local authorities placed the largest district of the megacity back into lockdown since Monday, November 21.
Because the southern Chinese city is one of the country's largest transportation hubs, Chinese oil demand is being hit in two ways. Due to the lockdown, Chinese transports are stuck, causing the country to consume less oil. But the oil-intensive industry is also not running at full capacity due to logistical problems and locked-in employees.
In addition to Guangzhou, more and more people in Beijing are also stuck in their homes. There, individual apartment complexes are placed in lockdown if there is a high infection rate. More than three hundred buildings are now locked.
New intervention
Due to the problems in China, the Brent rate is approaching its level at the end of September. During this period, the low price turned out to be a reason for OPEC+, the cooperation between the famous Arab oil cartel and Russia, to reduce crude oil production. The oil price threatened to become so low that the member countries would no longer be able to manage their finances. Russia in particular suffered greatly from the low oil price. Due to the war in Ukraine, the country has to offer customers significant discounts to sell their oil.
The cartel's intervention turned out to be a lot bigger than expected. The OPEC+ countries reduced their production targets by 2 million barrels per day, while analysts had expected half this reduction. In practice, the reduction in oil production was not that low. In practice, the production of the OPEC countries during this period was about a million barrels lower than their targets at the time.
Investment bank Goldman Sachs predicted that the intervention would lead to a price of $110 per barrel. It is now clear that this prediction did not come true. After the procedure, the price never exceeded $98. Now that prices are approaching pre-intervention levels, several analysts are warning that OPEC could turn off the oil tap further. It remains to be seen whether high prices will occur again after another intervention.
Just like the oil price, the price of diesel is also falling. At the beginning of the week the diesel price was still stable. When the oil price fell, the diesel price fell along with it. On Friday, November 18, the diesel price was at the highest level of the week, €141,52 per 100 liters of diesel. On Thursday, November 24, the price dropped to €136,27.