September 18, 2024 [Share Cafe]- Oil prices have dropped sharply from their year-long trading range as investors grow increasingly concerned about weakening demand from the world’s largest economies. Brent crude, which had been fluctuating between $73 and $92 since last October, fell to $68.68 on Tuesday—the lowest since December 2021. The decline follows a report showing that China’s oil imports are still trailing behind last year’s levels, amplifying worries over global demand.
Despite a slight rebound on Wednesday, the international benchmark has declined by 13% since August 26, when tight supply concerns had initially pushed prices higher. West Texas Intermediate (WTI), the U.S. benchmark, hit a low of $65.27, marking its weakest point since May 2023, before rebounding 2.1% on Wednesday. Brent crude recovered to $70.61 per barrel, partly due to production disruptions caused by Hurricane Francine along the U.S. Gulf Coast.
On Tuesday, OPEC lowered its 2024 oil demand growth forecast for the second consecutive month, just days after eight OPEC+ members announced a two-month delay in unwinding voluntary production cuts that were set to begin in October. Bjarne Schieldrop, chief commodities analyst at SEB, commented that market sentiment has turned bearish, with concerns over China’s economic health and a potential U.S. downturn fueling pessimism. He also hinted that OPEC might accept lower prices and increased market uncertainty.
Some analysts and market players are also cautious. Citi has recommended selling rallies, predicting oil prices could drop to $60 next year due to a potential surplus. Ben Luckock, head of oil at Trafigura, shared a similar view, suggesting Brent could soon fall into the $60s, though he advised against being overly bearish. Sliding prices pose challenges for OPEC+. Despite delaying a planned production increase of 180,000 barrels per day next month, strategists believe the group may struggle to prop up prices. Delaying the reversal of production cuts could lead to a permanent loss of market share to other producers. OPEC expects the bulk of supply growth this year to come from the U.S., Brazil, and Canada.
Holding down Brent prices, which averaged $82.90 this year until the end of August, has been the possibility that OPEC could release more oil if prices climbed too high. However, weak demand appears to have undercut this support. OPEC’s decision to delay production increases failed to stabilize prices, according to Nitesh Shah, head of commodities at WisdomTree. Shah argued that simply postponing production hikes wasn’t enough, and OPEC needed to commit to longer-term production restraints to reassure the market.
The recent price drop comes at a sensitive time, ahead of the U.S. presidential election in November. While lower oil prices may benefit Vice President Kamala Harris by reducing gasoline prices and curbing inflation, the market’s weakness also signals broader concerns about a potential U.S. economic slowdown. For much of the past five years, oil priced for delivery a year ahead has traded below near-term prices by nearly $5 per barrel, but this gap has now closed. According to Morgan Stanley, this shift suggests rising inventories, a typical trend during recessions, although the bank does not currently forecast a recession. Morgan Stanley has downgraded its forecast for Brent in the fourth quarter of 2024 from $80 to $75 per barrel and expects it to hold at $75 through 2025.
The U.S. Energy Information Administration (EIA) has forecast that crude prices will return to $80 per barrel this month and average $82 in the fourth quarter due to OPEC’s production cuts, which are expected to create a deficit despite ongoing concerns about weak demand. Meanwhile, countries looking to boost production, such as the United Arab Emirates, have reportedly adjusted their plans, with 2026 now seen as a more likely timeframe to increase output, according to oil strategist Jorge Leon.
