Oil prices have plummeted over the past week, dropping by $25 to their lowest point in three months and briefly falling below $90 a barrel. This decline comes after a period of high anticipation for a military escalation between the US and Iran, which had driven oil prices above $100 a barrel throughout October, peaking at $114 on the last trading day of the month. However, President Donald Trump's shift in stance before the midterms, coupled with a Democratic victory in the elections, signaled a potential resistance to further conflict, contributing to the price drop.
The oil market's dramatic decline is not solely attributable to political factors. Despite the largest oil supply shock in history, the world is now producing more crude than it consumes. The market has demonstrated remarkable adaptability, rerouting oil via pipelines and using complex shuttle and military operations to maintain flows through the Strait of Hormuz. While Middle Eastern oil transits remain volatile, averaging 70% of pre-war levels, they have increased from 9.8 million barrels per day at the war's outset to 20.7 million barrels per day last week.
To compensate for reduced Middle Eastern supply, oil majors have boosted output globally, particularly in Latin America, increasing flows by 1.5 million barrels per day from the same point last year. However, the primary factor behind the oil surplus has been a significant drop in demand. Oil consumption has fallen by 3.3 million barrels per day on average during the war, with a sharper decline of 3.8 million barrels per day in September and October. This demand reduction, driven by high prices and refinery constraints, has allowed the US to replenish key inventories, such as those in Cushing, Oklahoma.
The oil surplus provides the US with some leverage in the ongoing conflict with Iran. The US-led blockade has successfully halted Iran's legitimate oil exports since August, pushing the country's inflation rate above 70%. While a Democratic Congress may temper Trump's actions, the election results also demonstrated Iran's ability to inflict economic damage globally. Analysts suggest that the conflict is likely to persist without a quick resolution.