Can Oil Market Collapse?

Crude oil prices fell dramatically to the lowest level in nearly three years. By the end of the first week of September 2024, Brent crude oil price dropped steeply from $77.5/bbl to $71/bbl, WTI dropped from $73.55/bbl to $67.67/bbl, even below the level reached in March 2023 on the back of the Silicon Valley Bank crisis.

Not only Brent crude oil price fell sharply, but the futures market’s entire price curve has flattened significantly though structure is still modestly backwardated. Some market participants suggest that Contango is coming back if timespreads continue to ease off.

It is too complex to explain the steep price fall near the $70/bbl mark while US oil inventories decline to their lowest level in a year. This shows a disconnect between falling global oil inventories and falling oil prices.

The state of uncertainty becomes more certain even with a potential decline in interest rates. The most prominent repercussions of oil price decline are fears from the global economic recession that could further weaken oil demand. Moreover, speculative activities in the futures markets are extremely low due to exacerbated shortage in liquidity throughout the high interest rates era for nearly two years.

Can Oil Market Collapse Since Survived COVID-19?

Most of the analysis explains oil price fall over sluggish demand but also should consider the severe shortage in liquidity that impacts speculative activities. Oil market won’t collapse since it has already survived the largest oil demand shock in history during COVID-19. Conversely, if this can exacerbate the downward price movement, it should also consider the opportunity for substantial upside price volatility in the upward movement.

OPEC+ producers have reconsidered the plan to ease 2.2 million barrels per day (bpd) voluntary production cuts in October, Unanimously, 8 OPEC+ producers: Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman have agreed to extend the additional voluntary oil production cuts of 2.2 million bpd for two months until the end of November 2024. The change in output might not be conceptually because of the oil price slump in the first week of September, but because OPEC have reflected the weak oil demand in Asia, and recognized that the market won’t be able to absorb those barrels in 4Q24. Earlier, OPEC monthly report in August signalled such an output strategy when it made a downward adjustment in oil demand growth by 140,000 bpd to 2.11 million bpd.

Demand concerns have overshadowed OPEC+ moves to stabilise the market, oil prices have barely reacted to OPEC+ decision to postpone its plan to return 2.2 million bpd to the market. Crude oil prices collapse as supply disruptions ease but reasons behind prices drop are more complex. A growing realization that industrial growth is slowing down in China, Germany and the US have already affected oil demand in big industrial nations. US manufacturers are sliding towards a recession, with business activity contracting for the fifth month running in August. Also, it’d be interesting to see diesel demand in China in 4Q24, as a key indicator for the overall Asian market.

Oil price outlook – Driving the narrative and riding the wave

Weak macros keep injecting bearish sentiments as market sentiments remained weak amid uncertain economic outlook that continue to raise concerns over the upcoming oil demand in 2025. JPMorgan sees prices dropping toward $60/bbl in 2025 arguing that OPEC+ temporary fix won’t hold back the supply glut. Citibank’s oil price outlook for Brent crude price was at mid-$80s in their August report, then revised it to $70-$72/bbl, which is a good example of price movement driving the narrative trajectory in the upward and the downward movement.

The market is still largely influenced by bearish sentiments, reinforcing fears that next year might see balances swinging heavily towards oversupply unless OPEC+ proactively make an overall shift in output strategy to avoid a prolonged disorderly crude price rout.

Faisal Faeq

Energy Adviser (former OPEC and Saudi Aramco)

Twitter: @FAISALFAEQ