Why Oil Prices Have Experienced Seven Consecutive Weeks of Decline
US oil prices have fallen for seven consecutive weeks, their longest losing streak in five years, as pressure mounts on Harvard President Claudine Gay following the resignation of Penn's Liz Magill Spotify's staff reduction aims to accelerate their AI efforts, gaining favor from Wall Street
US oil futures recorded their seventh consecutive week of losses on Friday, marking their longest losing streak in five years. This prolonged decline is causing concern among analysts due to increased production worldwide, overshadowing the promises made by the Organization of the Petroleum Exporting Countries (OPEC) to limit supply. OPEC+, which includes Russia and other OPEC allies, agreed to cut oil output by 2.2 million barrels per day through the first quarter of 2024, but the market doubts that all members will adhere to this agreement.
Market concerns also stem from the anticipated decrease in crude oil demand, particularly in China, where the economy is showing signs of weakness. Consumer prices in China are experiencing their steepest decline since the peak of the pandemic in late 2020. Additionally, US gas prices have decreased, with an average of approximately $3.19 per gallon, marking a 22-cent decrease from a month ago and a 14-cent decrease from a year ago.
Before the Bell interviewed LSEG's Jim Mitchell and Corey Stewart, oil analysts, to gain insight into the factors driving down oil prices. The interview has been condensed and clarified for brevity.
Prior to the opening bell, oil futures have declined consistently for the past seven weeks. Is this historically meaningful?
Jim Mitchell: It's a bit of both. Market fluctuations are a given, especially in the massive oil market - the largest among commodity markets. However, oil also serves as a form of currency, playing a major role in funding many countries' entire GDP.
Corey Stewart: We've observed a period of low supply of crude oil, which led to higher prices. As we transition out of the traditional driving season, prices are naturally decreasing. The recent decline at the end of the year may not be surprising, given the shift from low supply to a slight oversupply in the crude oil market in the near future. While this may seem dramatic, it is not unexpected based on seasonal patterns.
Now, let's discuss supply. It appears that there is a change in expectations regarding OPEC+'s commitment to production cuts.
Recently, oil prices reached over $90 a barrel, which drove many countries, including the US, to increase their energy production. With record-breaking production in certain areas of the US, OPEC will face challenges in implementing previous tactics to control supply and raise prices. Their old methods will no longer be effective.
Are there other concerns? OPEC is not addressing Libya, for instance. Libya currently produces approximately 1.1 million barrels of oil per day and does not have a quota. Meanwhile, Iran is producing 3.2 million barrels, with the oil minister aiming to reach 3.6 million by the end of the first quarter next year. This indicates an increase, while Saudi Arabia continues to implement cuts. Considering the geopolitical landscape and changing crude production centers, does it seem like we are heading towards a significant power shift in the market?
Mitchell: After many years in this industry, I believe that every day is crucial. Whether the general public is aware of it or not, we are currently in a pivotal moment considering the global GDP and the fragility of the world economy.
Will we encounter any problems during the winter? I highly doubt it. Even if Europe experiences cold weather, I don't believe we will face the same concerns as we did last year.
Stewart stated that diesel inventories in Europe were at dangerously low levels last year, but they are now well above that. They are adequately supplied and prepared for a relatively mild winter.
The US production is now in more capable hands compared to four or five years ago. Companies are better equipped to withstand challenges, as they have focused on strengthening their financial positions instead of solely relying on increased drilling. Although OPEC still holds influence, its impact on this side of the world has lessened. As for concerns about declining crude demand in China, it's something to consider.
In the past two years, obtaining information from China has been challenging. Despite being a major data company with an office in Singapore and analysts located in China and other Southeast Asian countries, it remains difficult to gather demand information from China.
However, a couple of things are noteworthy. China's refining capacity continues to increase, currently at approximately 15.5 million barrels per day, with the US at around 17.7 million. It is expected that China will surpass the US in the coming years.
The Chinese government imposes quotas to limit the production capacity of the refining industry, preventing excessive growth. Despite these quotas, China still has the potential to sell gasoline in the Pacific products market, impacting refinery margins in Southeast Asia and the US.
When China begins to flood the Pacific products market with their goods, it's easy to assume that demand in their domestic market is declining, but this may not necessarily be the case. The tricky part with China is the significant credit risk they are facing. While there may be a decrease in demand, it is difficult to ascertain the exact extent of it.
Stewart: It is worth considering the implications when China increases its gasoline exports. Previously, their policy aimed to maintain domestic production. However, the rise in exports is now impacting prices.
Will oil prices continue to stay low in 2024? In the short term, the demand for crude oil has been experiencing some changes. Imports decreased by 10% last month compared to the previous month, and there has been a year-over-year drop of 9.3%. The demand for crude oil in China is also declining.
Pressure grows on Harvard President Claudine Gay after Penns Liz Magill resigns
Stewart forecasts a slower start to the year, anticipating that a weaker economy would lead to decreased demand and lower prices. Nevertheless, historical data shows consistent growth in petroleum demand almost every year.
With Liz Magill stepping down as president of the University of Pennsylvania, attention has shifted to her Harvard University counterpart Claudine Gay, as my colleague Eva Rothenberg reports.
Republican Rep. Elise Stefanik of New York, wrote "One down. Two to go" regarding Gay and MIT President Sally Kornbluth. "@Harvard, President Gay was asked 17 times whether calling for the genocide of Jews violates Harvard's code of conduct. She spoke her truth 17 times. And the world heard."
Stefanik, a member of the House Committee on Education and the Workforce, called on Magill, Gay, and Kornbluth to testify about their handling of alleged antisemitic incidents on campus following the Israel-Hamas conflict. All three gave testimony that was widely criticized for failing to explicitly condemn calls for the genocide of Jews as violations of campus harassment and bullying policies. In response, a bipartisan group of lawmakers sent a letter to the governing boards of Harvard, Penn, and MIT calling for the removal of their university leaders. Additionally, hundreds of faculty members have signed a petition in support of Gay.
Gay apologized for her remarks, expressing her regret in an interview with The Harvard Crimson on Thursday. "Words matter," she stated. "I got caught up in an extended, combative exchange about policies and procedures," she explained to the student newspaper. "What I should have done in that moment was return to my guiding truth, which is that calls for violence against our Jewish community have no place at Harvard and will never go unchallenged."
Despite this, some major donors, such as billionaire hedge fund CEO Bill Ackman, have remained unswayed and critical of Gay. Ackman expressed his concerns in an open letter to Harvard's governing board, citing President Gay's failure to enforce the university's own rules and the resulting fear and lack of safety felt by Jewish students, faculty, and others. He concluded with a pointed question about whether Harvard would still consider Claudine Gay for the position, and stated that the decision on President Gay should be clear-cut based on the presented issues.
Spotify slashes staff to move faster into AI â and Wall Street loves it
Harvard has become one of the focal points for allegations of antisemitism in the wake of the recent Hamas terror attacks and Israel's response in Gaza. The Department of Education is currently investigating 14 colleges, including Harvard, for potential discrimination against individuals with shared ancestry, which encompasses both Islamophobia and antisemitism.
Spotify became well-known in the audio-streaming industry for its ultra-personalized user experience, achieved through the use of artificial intelligence and a team of 9,800 employees by the end of 2022.
However, with three rounds of layoffs within a year - 590 positions in January, 200 in June, and another 1,500 last week - Spotify's focus on investing in AI to improve margins for its podcasting and audiobook divisions appears to signal a significant change in strategy. Wall Street appears optimistic about the potential success of this strategy shift, as reported by my colleague Sergio Padilla.
According to equity research analyst Justin Patterson of KeyBanc Capital Markets, Spotify has expanded its AI DJ and AI Voice Translation features to 50 new markets, and is also introducing audiobooks to Premium Subscribers. This move is expected to increase user engagement and eventually lead to higher monetization. The parent company, Spotify Technology SA, has seen a 30% increase in shares over the last six months and a 135% increase year to date.
The company is following suit with other tech firms in making cutbacks due to decreased demand during the pandemic. Additionally, it needs to recoup over $1 billion spent on podcasting, including deals with celebrities for podcasts that never materialized and the acquisition of podcast studios that were later closed. "Economic growth has significantly decreased and capital has become more costly. Spotify is not immune to these challenges," Ek wrote in a letter to staff posted on the company's website.
