By Brent crude oil prices appear to be settling into a range of $70-$75 per barrel, as escalating tensions in the Middle East fail to push prices higher.
Recent market dynamics reveal a concerning balance of weak global demand growth and a positive supply outlook, leading investors to reassess the fundamental factors influencing oil prices.
As geopolitical uncertainties persist, analysts suggest that while recent price fluctuations may offer temporary relief, they are unlikely to signify a sustainable recovery in the oil market.
Geopolitical tensions overshadowed
Oil prices experienced a decline earlier today due to a combination of oversupply and disappointing global demand growth.
Although prices have rebounded slightly in response to rising tensions in the Middle East, analysts warn that this increase may be short-lived.
The ongoing conflict between Israel and Hamas has yet to significantly disrupt oil supply from the region, which holds approximately half of the world’s oil reserves.
Matt Stanley, head of market engagement for EMEA & APAC at Kpler, commented,
Over the last year that this conflict has been ongoing, markets haven’t been too concerned about supply being affected. The risk premium lies in the threat of a wider conflict in the region.
This sentiment reflects a broader apprehension about geopolitical tensions overshadowing the fundamental factors driving the oil market.
Oversupply looms in oil market
Despite the geopolitical climate, analysts are focusing on the oversupply in the oil market.
OPEC and its allies have indicated plans to increase crude oil production by 180,000 barrels per day starting in December, a move that coincides with a period of weak global demand.
This increase will stem from unwinding some voluntary output cuts by eight members of the OPEC+ group.
Furthermore, Saudi Arabia has signaled a preference for regaining market share rather than maintaining higher oil prices, highlighting its unwillingness to tolerate non-compliance with production cut quotas.
Notably, Iraq and Kazakhstan have been cited for overproducing crude oil over the past eight months.
In Libya, a political dispute that previously restricted oil exports has been resolved, potentially allowing the country to increase its oil shipments.
This additional supply could further depress oil prices in an already fragile market.
Poor global demand adds to bearishness
Global oil demand remains fragile, with consumption growth lagging behind supply increases.
The International Energy Agency (IEA) reported that demand rose by only 800,000 barrels per day in the first half of 2024, a sharp decline from the growth of 2.3 million barrels per day seen in 2023. For the year, demand is expected to grow by just 900,000 barrels per day.
OPEC’s demand forecasts appear overly optimistic, projecting growth of 2.0 million barrels per day for the year. Stanley remarked,
Demand forecasts have simply not materialized in the way many hoped. I’m not saying the wheels have fallen off, far from it, just those forecasts that seemed somewhat delusional at the start of the year have turned out to be delusional.
Adding to these challenges, China’s manufacturing activity continues to falter, raising doubts about the potential for recovery in the world’s largest crude oil importer.
James Hyerczyk, an analyst at FXEmpire.com, noted,
The muted response to Beijing’s fiscal stimulus measures raises doubts about the likelihood of a significant recovery in Chinese oil consumption.
OPEC committee meeting on Wednesday
Amidst the backdrop of weak demand and an expected increase in supply, OPEC’s Joint Ministerial Monitoring Committee is set to convene on Wednesday.
The committee will discuss market dynamics and is likely to provide recommendations for OPEC+ ministers.
Analysts speculate that the committee will maintain the current output policy, but there will be particular attention on whether they will address Iraq and Kazakhstan’s non-compliance with their respective output cut quotas.
In September, Brent crude oil prices on the Intercontinental Exchange dropped more than 8%, primarily driven by China’s economic struggles and rising supply.
As of now, the December Brent crude oil contract is priced at $73 per barrel.
While prices have rebounded today, traders are likely to remain focused on the gloomy demand growth outlook, especially as a potential supply glut looms large on the horizon.
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