Crude oil prices on global markets have fallen considerably in recent weeks.

Adding to the drop has been the relative strength of the euro against the US dollar (oil contracts are priced in dollars, so as the euro rises against the dollar, oil becomes cheaper).

Together, this means that a barrel of oil is currently priced at around €66, which is €14, or 17.5%, lower than the price at the start of July.

On the oil side, the price reduction is due to the outlook of both supply and demand.

An apparent deal between the various factions vying for control of Libya could lead to the resumption of crude exports from that country. OPEC+ (Organisation of Petroleum Exporting Countries + Russia) was scheduled to increase production at the start of October, which will further add to supply - although this increase has been pushed back to December due to the current low crude price.

Demand

The demand side continues to look weak, with Chinese imports for the year so far running behind the level seen in 2023.

This implies that the Asian nation which had been expected to deliver the bulk of the growth in Asian demand this year will actually end 2024 consuming less oil than it did in 2023.

Oil refineries are finding their margins are tightening as refined product is not selling as quickly as expected, further adding to pressure on demand for crude.

Oil market investors will need to see a meaningful return of demand - or reduction in supply - before they help push the price of crude higher again.

On the currency side, the relative strength of the euro against the US dollar is a function of central bank expectations.

The US central bank - the Federal Reserve - is currently targeting an interest rate of between 5.25% and 5.5% for its main benchmark funds rate.

Members of the central bank’s decision-making board have been vocal recently on the need to cut rates over the coming months as the US jobs market shows signs of weakness and inflation drops towards their target.

Expectations

While the European Central Bank is also expected to cut rates this month, investors forecast that the US will cut them faster. Generally, in markets, expectations for cuts in interest rates will lead to a weaker currency, as we have seen in the US dollar recently.

All these factors taken together have helped fuel the significant drop in oil prices in the last couple of months.

While there has been some lowering of prices at the pump, the chances of a major drop in diesel prices here will have to be balanced against the increase in carbon tax which is expected to come in next month’s budget.