What led to this fall's oil price slide — and what might come next

The price of oil continued its rough ride this week, with the benchmark North American crude blend known as West Texas Intermediate, or WTI, skidding again below $70 US a barrel on Tuesday, down from September when the price was hovering around $90 US.

This fall has seen oil prices take on a gradual — and often bumpy — decline, an about-face from multiple bullish forecasts in September that projected the return of $100 US oil before the end of the year. On Tuesday, the January crude oil contract was down $2.71 US at $68.61 US per barrel.

Analysts say there are a number of factors at play here, namely geopolitical instability, fears of a global recession and hesitation around whether there will be follow through on oil output cuts agreed to by Saudi Arabia, Russia and other members of OPEC+ in late November.

Last week saw the seventh-consecutive weekly decline in crude prices, the longest consecutive losing streak on a weekly basis since the end of 2018, noted Rory Johnston, energy researcher and founder of the Commodity Context newsletter.

"We've been in this very declining, kind of weakening environment since the end of September, and it just keeps getting worse," Johnston said.

"The market is clearly signalling deepening or worsening oversupply conditions."

Crude oil from Canada's oilsands, which goes by the name Western Canada Select (WCS), almost always trades lower compared to WTI, and analysts often track the price gap between the two. That differential is sitting around $20 US, and Johnston said he considers the natural differential to be around $13 to $15.

"I do believe we are starting to see a real, earnest return of pipeline constraints, pipeline bottlenecking," he said.

U.S. oil production achieving record levels

As Johnston and others will point out, understanding the full landscape around what led to the broader price decline this fall requires examination of several factors.

Among those factors is what's referred to by U.S.-based website Axios as "America's quiet oil boom." The United States is in the midst of a year that is setting record levels of oil production, surpassing levels seen before the pandemic.

That additional level of supply is starting to create an issue for OPEC, said Jeremy McCrea, managing director of energy research with the firm Raymond James.

For the latest round of discussion, McCrea said, it wasn't as easy to get everyone on board as it was in the past — signalling that perhaps OPEC is at its limit in terms of how much it's willing to cut.

"If the U.S. does continue to keep on producing more and more, the ability for OPEC to show more cuts may not be enough to balance the market," he said.

"That's what's really put the pressure on oil prices here, just in the last couple of weeks."

Geopolitical factors remain a concern

Though the World Bank has warned that the Israel-Hamas war could push oil prices as high as $157 US, the reverse has so far taken place.

"There have been increasing risks that you would typically associate with a far riskier, higher price environment," Johnston said. "The fact that we've declined so rapidly in the face of that, I think, makes the fundamental concern that much greater."

Meanwhile, the next steps for oil companies remain up in the air amid a world going through an energy transition. These companies kicked off 2023 with historic profits and an eye on targeting debt and returning money to shareholders. These days, McCrea said, companies have cash to spend.

"What we're finding is more of that money is being slightly put toward growth now," he said. ''That's what's kind of leading to this, 'Oh, are we going to be in an oversupplied world, here, still?' 

"That said, though, in our discussions with a lot of the Canadian CEOs here, the volatility in the oil price has really kept them cautious."

Meanwhile, Tristan Goodman, president of the Explorers and Producers Association of Canada, said he expects that more stability could be in the cards moving forward.

"I think there's some opportunity as some stability comes into play with the [Trans Mountain expansion project], as well as on the natural gas side, LNG Canada and the Coastal GasLink," he said.

The three long-anticipated projects for Canada's fossil fuel sector have faced various delays, but when complete, are expected to bolster energy exports.

"It's going to be cautious, but I think you'll start to see the word 'growth' re-enter the conversation a bit, but much more nuanced than we've seen in previous decades."