Oil prices have fallen to a five-year low, with US oil down 19% over the past year; OPEC and the US have both increased production.

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Concerns over oversupply and a global economic slowdown are pushing U.S. crude oil prices to their lowest levels since the post-pandemic recovery, with the simultaneous production increases by the U.S. and OPEC exacerbating the market’s supply-demand imbalance.

On Thursday, U.S. WTI crude oil futures closed at $56.99 per barrel, down 2.2%, marking the lowest price since February 2021 and a decline of 19% over the past year. This week’s drop has surpassed the lows reached earlier this spring when Trump’s announcement of a series of tariff policies raised concerns about economic turmoil.

The core reason for this round of oil price plunge is that OPEC, led by Saudi Arabia, is rolling back previous production cuts in order to regain market share, while U.S. shale oil producers set a new record in July with daily output surpassing 13.6 million barrels. The simultaneous production increases by these two major suppliers have made matters worse for the market.

Analysts point out that falling oil prices benefit U.S. consumers, as it means gasoline, diesel, jet fuel, and heating oil prices will decline further. According to AAA data, the nationwide average retail price for regular unleaded gasoline was $3.057 a gallon on Thursday, about 15 cents lower than a year ago. But for the U.S. oil industry, which is facing narrowing profit margins and mass layoffs, this presents a tough challenge.

OPEC Increases Production & U.S. Output Remains at Record Highs

According to a previous article by Jianshi, OPEC, led by Saudi Arabia, announced earlier this month it will increase production by 137,000 barrels per day in November, the same increase as in October. The organization had already significantly rolled back production cuts a year earlier than planned in September and is gradually abandoning the output constraints implemented in 2023 when energy prices retreated from post-Russia-Ukraine war highs.

OPEC said this week it expects demand to rise next year and for the market to regain its balance. The organization’s move is aimed at regaining market share from free-market oil producers such as the U.S., Brazil, and Guyana, continuing a cycle of price wars OPEC has waged with these countries over the past decade.

Market forecasting agencies such as the International Energy Agency predict that, since producers from the Middle East to Midland, Texas are extracting oil as prices reach new highs rather than fall to multi-year lows, the oversupply situation will worsen in the months ahead.

Additionally, according to the latest data from the U.S. Energy Information Administration, U.S. oil producers hit a new record in July with daily output surpassing 13.6 million barrels. Despite the government shutdown, weekly oil reports from federal agencies show that output has remained near this level.

Although oilfield services firm Baker Hughes reports that the number of U.S. crude oil rigs has dropped by 63 compared to the same period last year, improved efficiency and the ever-expanding scale of wells allow domestic producers to extract more oil with less input.

Energy data company East Daley Analytics forecasts that U.S. oil output will stay around the record 13.6 million barrels per day at the end of this year. The company’s senior analyst, Chris Noonan, said:

U.S. producers are unlikely to slow down, partly because they are usually obligated to supply other fuels such as natural gas and propane, which come from the same wells as oil.

Noonan pointed out:

Producers are unlikely to abandon drilling projects for which they have invested millions of dollars and deployed building-sized rigs. If producers pause, they may lose market share and miss a price rebound, as it may take months for drilling projects to go from launch to profitability.

It is worth noting that five years ago, gasoline demand plummeted during pandemic lockdowns, causing U.S. oil prices to fall below zero for the first time in history—sellers actually had to pay buyers to take oil off their hands. Producers were forced to store the sudden oil surplus in offshore tankers, and prices took about a year to recover.

Now, large amounts of oil are once again being stored offshore. According to the International Energy Agency, offshore oil inventories rose by about 3.4 million barrels per day in September, the largest increase since the pandemic.

Consumers Benefit but the Industry Is Under Pressure

For American drivers, an already-expected scenario of gasoline expenditures occupying the smallest share of disposable income in years is further improved by the supply surplus.

In many states, including Michigan, Ohio, Texas, and Colorado, average gas prices have already fallen below $3 per gallon. Earlier this month, the U.S. Energy Information Administration forecast that the national average price would reach $2.90 a gallon next year.

According to media reports, Trump once promised voters he would lower fuel prices, and for most of his term, he worked to dismantle the previous administration’s efforts to promote renewable energy, favoring fossil fuels instead.

He encouraged drilling both domestically and abroad, but at the same time, his trade policies dampened global economic growth expectations, weakening the outlook for crude oil consumption.

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