Mario Tama/Getty Images
- Oil benchmarks have tumbled since the start of October, despite war breaking out in the Middle East.
- Worries about slowing demand and China's faltering economy have weighed on crude.
- The slump could drag down gas prices – and help the Fed win its battle against inflation.
Oil prices have tumbled over the past two-and-a-half months, putting the commodity on course for one of its worst quarters since the pandemic despite war breaking out in the Middle East.
Brent futures are down 22% since the start of October, according to data from Refinitiv, while West Texas Intermediate futures have slipped 20% over the same period.
That's put the benchmarks on track for their second-worst three month stretch since the first quarter of 2020, when prices collapsed nearly 70% after COVID-19 shut down the global economy.
Here's why oil is performing so poorly – and how that's impacting inflation, gas prices, and interest rates.
Sluggish demand
Worries about demand weakening in 2024 have been the driving force behind crude's dismal quarter, with analysts predicting the world economy will experience a slowdown next year as it starts to feel the full impact of central banks' aggressive interest-rate hikes.
China has been a particular source of concern. In 2023 Beijing has struggled to revive growth, failed to stave off deflation, and been unable to put an end to a seemingly neverending property-market crisis.
Since 2017 the country has been the world's largest oil importer, according to data from the Energy Information Administration, so signs of economic weakness there tend to have a knock-on effect on crude.
When Hamas attacked Israel on October 7, traders fretted that major producer Iran could become embroiled in a wider conflict in the Middle East – but that's yet to materialize, removing one factor that could've supported the commodity.
Traders have also so far shrugged off aggressive production cuts by Russia and Saudi Arabia, the de facto leaders of the OPEC+ cartel, who've vowed to slash their output by 2.2 million barrels a day over the first quarter of 2024 in a bid to squeeze the price of crude higher.
But those two factors could come back to the fore at the start of next year to revive oil, according to analysts.
"Although oil prices have retreated amid expectations of lower demand next year, OPEC+ are ready to extend production cuts and there is also a risk that geo-political tensions will rear up again, pushing crude costs higher," Hargreaves Lansdown's head of money and markets Susannah Streeter said Wednesday.
Gas prices slide
Unless you're a commodity trader or energy company executive, tumbling oil prices are probably good news.
Americans are already feeling the benefits at the pump, with national average gas prices falling 12 weeks in a row to just $3.10 per gallon, according to American Automobile Association data, gas price is down nearly 80 cents from their peak in September.
Cheaper gas has helped to pull down headline inflation. Tuesday's Consumer Price Index report showed that inflation rose 3.1% in November, for a second straight month of declines, with falling energy prices contributing to the slowing rate.
That print set the stage for a Federal Reserve meeting where chair Jerome Powell signaled that the central bank is now done raising interest rates, with analysts now predicting that it'll start slashing borrowing costs some time next year. That, in turn, would pull down mortgage rates and credit-card repayment costs.
Even the stock market is likely to benefit from crude prices falling, with listed companies – excluding Big Oil names like ExxonMobil and Chevron – likely to see their costs drop and their profits rise.