In recent months, the oil market has demonstrated notable resilience against geopolitical risks. Conflicts in Ukraine and the Middle East have had minimal effect on oil prices recently.
Geopolitical risk premiums have caused occasional price spikes over the past year, but the physical oil markets have managed to adjust to changes in trade routes with relative ease. Analysts at the APPEC conference by S&P Global Commodity Insights this week noted that the redirection of Russian oil shipments from Europe to Asia, and the rerouting of tankers via the Cape of Good Hope instead of the Red Sea route, have been successfully managed. Currently, there is no global oil shortage.
One reason for this stability is the subdued demand, particularly from China, the world’s largest crude oil importer. Weak demand and declining refining margins have pressured oil prices and market sentiment. This has led speculators and money managers to reduce their bullish positions on oil futures to their lowest level since 2011.
Following a selloff last week, oil prices briefly stabilized on Monday before dropping by 4% on Tuesday. This decline followed OPEC’s reduction in its demand forecast for the second consecutive month. On Tuesday, Brent Crude prices fell below $70 per barrel, while the U.S. benchmark, WTI Crude, dropped below $66 per barrel. Both benchmarks reached their lowest levels since December 2021.
Demand concerns have been a significant factor in the market recently. These concerns have limited the impact of geopolitical events and supply disruptions, such as production shut-ins due to hurricanes in the U.S. Gulf of Mexico and political conflicts in Libya. Last week, refining margins in Asia fell to their lowest level for early September since 2020. According to data from LSEG cited by Reuters, refining margins in Singapore plummeted by 68% from August to September.
As refining margins decline and fuel supply increases amid weak demand, analysts anticipate further reductions in refining utilization. This trend is likely to negatively affect oil demand in Asia, the world’s most significant growth market.
This week, OPEC further contributed to market pessimism by downgrading its oil demand growth forecast for this year and next. The cartel, which recently postponed the easing of its production cuts from October to December, reduced its global oil demand growth estimate in its Monthly Oil Market Report published on Tuesday. OPEC now expects global demand to grow by 2.03 million barrels per day (bpd) in 2024, down from the previous estimate of 2.11 million bpd. For 2025, the growth forecast was reduced to 1.74 million bpd from 1.78 million bpd. While these adjustments may seem minor, the second consecutive downgrade suggests that OPEC may have overestimated demand growth, particularly in China, when it first projected 2024 figures over a year ago.
OPEC also revised its forecast for Chinese demand growth in 2024 down to 653,000 bpd from 700,000 bpd. The report highlighted that challenges in the real estate sector and the rising adoption of LNG trucks and electric vehicles could dampen future diesel and gasoline demand.
At the APPEC conference, oil trading giants Trafigura and Gunvor expressed bearish views on prices and demand. Ben Luckock, Global Head of Oil at Trafigura, predicted that Brent prices could fall into the $60s but advised caution for traders. Torbjorn Tornqvist, co-founder and chairman of Gunvor, suggested that Brent’s fair value is now $70 per barrel due to supply exceeding demand.