By Crude oil prices hit a 3-year low on Tuesday, September 10, 2024, as negative market sentiment overwhelmed traders.
WTI crude fell by over 4% to $65.75 per barrel, while Brent crude dropped to $69.19 per barrel.
These declines mark the steepest drop in oil prices since late 2021.
Market participants are reacting to a combination of factors, including supply disruptions and fears of economic instability.
The timing of the price drop coincided with the highly anticipated US presidential debate between Donald Trump and Kamala Harris.
Investors are now worried about how the outcome of the election could influence US energy policy and the broader global economy.
Bearish sentiment dominates oil markets
The current selloff in oil markets is driven by record levels of bearish sentiment among hedge funds and money managers.
According to the Commodity Futures Trading Commission (CFTC), speculative positions in WTI and Brent crude are at multi-year lows.
Net speculative long positions, which reflect bets on rising prices, have dropped to 139,242 lots as of September 3, 2024, the lowest level since 2011.
Over the past eight weeks, traders have sold a staggering 311.2 million barrels of crude oil.
Analysts at Standard Chartered report that their crude oil positioning index has reached -100.0 for the first time in 2024, indicating extreme pessimism.
However, analysts caution that such low index scores often precede price rallies, as seen in December 2023 when prices rebounded sharply.
Misplaced fears of an oil surplus?
Despite the prevailing bearish sentiment, many experts believe fears of a crude oil surplus are exaggerated.
While there are legitimate concerns about slowing demand in key markets like China, the fundamental supply-demand balance does not support the extreme negativity in the market.
The US Energy Information Administration (EIA) recently reported a 1.816 million barrels-per-day (bpd) drop in U.S. crude stockpiles, signaling a tightening supply.
The EIA still forecasts that supply shocks could push prices back above $80 per barrel in the coming months.
Supply disruptions in Libya and Gulf of Mexico
In addition to market sentiment, global oil supply has been affected by disruptions in key regions.
In Libya, a standoff between the Haftar clan and the Central Bank has blocked oil exports for two weeks, cutting crude output from 1.15 million bpd in July to just 230,000 bpd.
Key export terminals such as Es Sidra and Ras Lanouf remain closed, tightening global supply.
Meanwhile, in the Gulf of Mexico, Tropical Storm Francine has caused widespread evacuations of offshore oil platforms, temporarily reducing production by over 400,000 bpd.
OPEC+ Struggles to Support Prices
OPEC+ has taken steps to support prices, including delaying a planned production increase of 180,000 bpd originally scheduled for October.
The group has postponed this hike to December in an attempt to stabilize the market.
However, the market’s reaction was muted, and prices continued to slide below $70 per barrel.
OPEC+ also revised its oil demand forecast for 2024, cutting its 2025 outlook to 1.74 million bpd from earlier expectations.
Although demand is still expected to grow, it falls short of earlier projections.
How does China affect oil prices?
China’s slowing economy has become a major concern for global oil markets.
The world’s largest crude oil importer has seen a sharp reduction in demand growth this year, partly due to the country’s aggressive push towards electrifying its transport sector.
Until recently, China’s oil demand had been growing by 500,000 to 600,000 bpd annually, but that figure has now slowed to around 200,000 bpd.
For the first seven months of 2024, China’s oil imports were 320,000 bpd lower than during the same period last year.
With China struggling to meet its economic growth target of 5% and the shift towards electric vehicles accelerating, the country’s demand for oil could continue to weaken in the coming years.
The potential impact of US energy policy
The upcoming US presidential election could also have significant implications for the oil market.
Donald Trump has pledged to deregulate the US shale oil sector if elected, aiming to boost production and lower gasoline prices.
However, analysts point out that US shale oil production is already near record levels, and further increases in output could exacerbate the current supply glut, pushing prices even lower.
However, Trump’s plans to increase oil production may not be economically viable, as WTI prices around or below $60 per barrel could make some US shale operations uneconomic.
Moreover, increasing supply in an already oversupplied market could trigger further price declines, putting additional pressure on producers.
A volatile market ahead
WTI crude oil prices have dropped over 21% since July, and technical analysis suggests further declines could be ahead.
The current support level is between $65 and $66—if prices fall below this range, they could drop further to $60.
On the upside, resistance is expected around $71, and prices would need to rise above $75 to signal a potential recovery.
Short-term price movements will also be influenced by upcoming U.S. economic data and the Federal Reserve’s decisions.
While the bearish sentiment has driven prices to multi-year lows, some analysts argue that the market may be oversold.
The extreme positioning by hedge funds and money managers suggests that a price rebound could occur if traders begin to reassess the actual supply-demand balance.
Supply disruptions in Libya and the Gulf of Mexico, combined with OPEC+’s continued production cuts, should provide some support to prices in the near term.
Additionally, the potential for a recovery in Chinese demand, while uncertain, could improve the outlook for oil demand growth in the medium term.
However, investors should not rush to make a decision, as the market faces significant uncertainties.
The outcome of the U.S. presidential election could have a profound impact on energy policy and global oil production.
China’s economic slowdown and the global shift towards renewable energy and electric vehicles pose long-term challenges to oil demand.
Lastly, let’s not forget about the ongoing war in the Middle East which does not seem to be slowing down anytime soon, exacerbating further the grim long-term outlook for the price of crude oil.
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