Oil prices have seen sharp declines in recent months, with Brent crude falling to $70.6 per barrel, its lowest point since December 2021. Similarly, West Texas Intermediate (WTI) dropped to $67.2, marking a 14-month low. The sharp fall in prices reflects multiple global factors, including economic concerns, shifts in market sentiment, geopolitical developments and currency fluctuations.
Brent crude’s recent weekly loss of 10%, exacerbated by the contract rollover at the beginning of September, marks the largest weekly decline since October 2023. When adjusted for the rollover, the actual drop stands at 7.6%, a significant reduction for the oil market. WTI faced a similar decline, losing 8% over the week, a level not seen in almost a year. These movements in the oil market indicate a significant shift in the short-term outlook.
The narrowing of the price spreads between the closest contracts and those set to expire in six months further illustrates this shift. On Friday, less than $1 separated Brent’s closest contracts from those further out, with just 35 cents separating the first two forward contracts. This shrinking spread suggests traders are less concerned about immediate supply disruptions or shortages than they were just weeks ago.
“This year, the premiums for short-term delivery of oil have never been cheaper,” noted Mohamed Hashad, Chief Market Strategist, Noor Capital. “As a result, traders are far less anxious about the oil market than they were a few weeks ago. Speculative investors’ actions, which showed a large reduction in their net long holdings in Brent and WTI in the week ending September 3, similarly mirror this.”
The easing of supply worries is also reflected in speculative investors’ actions. According to data from the Commodity Futures Trading Commission (CFTC) and the Intercontinental Exchange (ICE), net long positions in both Brent and WTI have dropped to their lowest levels of 2024. This pullback by investors signals growing scepticism about the short-term recovery of oil prices.
Bearish outlook
Several key factors are driving this bearish outlook for oil. First, weaker economic data from the US and China has raised concerns about a potential global economic slowdown. As two of the world’s largest consumers of oil, any reduction in their demand reverberates across global markets. In recent months, manufacturing activity in both countries has slowed, diminishing expectations for sustained oil consumption growth.
Second, negative sentiment from the stock market has spilled over into commodities, including oil. Investors remain cautious about the broader economic outlook, and this sentiment is reflected in oil futures markets. Additionally, geopolitical developments have played a role in reducing market anxiety. Ceasefire discussions in the Middle East have alleviated fears of immediate supply disruptions from the region, contributing to the downward pressure on prices. Currency fluctuations have also impacted the oil market. A stronger US dollar has made oil more expensive for countries that do not use the dollar, reducing demand. This dynamic has further contributed to the recent drop in prices as global consumption weakens in the face of higher costs.
US energy inventories
In the US, energy inventories provide another critical insight into the supply-demand balance. As of early September 2024, crude oil inventories stood at approximately 420 million barrels, reflecting a slight increase due to lower refinery runs and higher imports. While gasoline stocks have seen fluctuations driven by high summer driving demand, distillate fuel inventories, which include diesel and heating oil, remain below their five-year average, signalling tighter supply conditions. Despite these variations, the US Strategic Petroleum Reserve has remained stable at around 350 million barrels, with no significant releases in recent months. These inventory trends highlight the complexity of the US energy landscape, where fluctuations in supply and demand play a key role in shaping market expectations.
US production levels have also contributed to the recent market sentiment. The US continues to be one of the world’s largest oil producers, with crude production stable through August 2024. However, weaker-than-expected economic data, particularly in manufacturing, has dampened expectations for oil demand, influencing the global outlook.
China’s manufacturing activity
China, as another major player in the global oil market, has seen its own challenges. The country’s manufacturing activity in August 2024 fell to its lowest level in six months, raising concerns about the continued strength of its economy. This decline in industrial output is expected to reduce China’s oil demand in the short term, further weakening global demand expectations. China has also increased its oil imports from Russia, helping to maintain its energy supplies despite Western sanctions on Russian oil. This strategic partnership has allowed China to benefit from discounted Russian crude, easing some pressure from the broader market.
Russia remains a critical oil exporter despite the sanctions imposed by Western countries. The redirection of Russian oil exports to Asia, particularly to China and India, has allowed Russia to maintain significant revenue streams. Russia’s coordination with OPEC+ on production adjustments has also helped manage the global oil supply. Despite facing economic restrictions, Russia’s ability to maintain its export levels has helped prevent a major supply shock in the global market.
OPEC+
OPEC+, the coalition of oil-producing nations, has played a key role in stabilising the market. The group’s decisions on production quotas have been instrumental in managing supply. In August 2024, OPEC+ delayed planned production increases in response to the sharp decline in oil prices to prevent further oversupply. However, global oil supply still rose slightly in August due to increased output from OPEC+ countries. Weaker economic data from major economies like the US and China have complicated the group’s efforts to balance supply with demand.
Recent market data reflects the ongoing volatility in oil prices. Throughout August 2024, Brent crude experienced a significant drop, falling by $6 per barrel during July. By early September, the decline had accelerated, with Brent trading below $75 per barrel. On September 9, Brent crude closed at $71.45, reflecting the continued impact of weakening global demand and growing concerns of oversupply in the market.
The combined effects of weaker economic data, negative market sentiment, geopolitical stability and currency fluctuations have all contributed to the recent sharp declines in oil prices. As global markets grapple with these issues, the outlook for oil remains uncertain, with traders and investors keeping a close watch on future developments.