Oil market analysts are bracing for further volatility in the coming weeks after crude futures tumbled to a nine-month low. The decline is attributed to expectations that disruptions in Libyan oil supplies will be short-lived, with exports anticipated to resume sooner than initially feared.
On September 4, crude futures continued their decline during European trading hours, following a significant drop on September 3. ICE Brent futures fell nearly 5% to settle at $73.75 per barrel. Meanwhile, Platts assessed physical Dated Brent at $75.83 per barrel on September 3, marking a 4.8% decrease from the previous day and the lowest level since January 8, 2024.
Despite a brief recovery earlier on September 4, driven by reports that OPEC+ might delay some production cuts planned for October, the November Brent futures contract fell below $73 per barrel by 1415 GMT.
Crude prices had already dropped from a recent high of $82 per barrel in mid-August due to weak Chinese import data, reduced refinery activity, and signs of slowing global oil demand. Recent downward revisions to oil price forecasts by major investment banks have also dampened market sentiment.
Goldman Sachs, on August 27, reduced its Brent oil price forecasts for 2024 and 2025 by $5 per barrel. The bank cited factors such as unexpected increases in OECD oil inventories, efficiency gains from U.S. shale producers, and falling natural gas prices as reasons for the adjustment.
The latest price slump has been largely driven by two main supply-side factors. Libya, which has faced ongoing volatility in its oil sector since 2011, has been a major contributor to the recent price drop. On September 3, rival political factions made progress towards a deal that could end a nationwide crude shutdown. This shutdown had reduced production by 63% in one week, equivalent to 724,000 barrels per day. Force majeure is in effect on the Sharara and El-Feel fields, which produce a combined 370,000 barrels per day. However, a breakthrough in UN-led negotiations on the central bank crisis could lead to a resolution, with the House of Representatives and the High State Council agreeing to appoint a new governor within 30 days and extend consultations until September 9.
The recent price decline also presents a challenge for OPEC+, which is set to start unwinding 2.2 million barrels per day of voluntary cuts from October, beginning with a 190,000-barrel-per-day increase. OPEC+ leaders, including Saudi Arabia and Russia, have indicated that the increase depends on market conditions. However, there seems to be little appetite among the group to keep unused capacity offline, especially given recent quota non-compliance by Iraq and Kazakhstan.
Market observers believe that the current price slump will make it increasingly difficult for OPEC+ producers to adhere to their original plan. Payam Hashempour, research associate director at Commodity Insights, noted that the Libya crisis highlights the ongoing risks related to supply and demand fundamentals. “While recent outages in Libya could potentially drive prices higher, there is still a large amount of oil available. Unless there is a sustained drop in supply, geopolitical fears should have only a short-term impact,” Hashempour said.
The potential for a resolution in Libya remains uncertain, as political forces have only agreed to appoint a new central bank governor within the next 30 days. UBS, in a September 4 note, expects Brent prices to recover above $80 per barrel in the coming months. Giovanni Staunovo, UBS’s oil strategist, pointed out that despite weak Chinese demand, overall demand remains strong in other regions and supply growth has disappointed in some non-OPEC+ countries. “We expect prices to recover from current levels over the coming months, despite likely volatility in the near term,” Staunovo said.
Despite the recent price drop, indicators are mixed. The crude forward structure shows tightness, with prompt prices higher than future-dated contracts, suggesting concerns over near-term supplies and robust demand. However, the backwardation in crude prices has narrowed recently. For instance, the NYMEX front-month crude premium to the 12th month settled at $3.46 per barrel on September 3, down from $5.87 per barrel on August 26 and $8.28 per barrel on July 18. Commodity Insights analysts expect prices to remain soft through autumn, averaging $80 per barrel in December and lower in 2025.
Global liquids consumption is projected to decrease by 1.46 million barrels per day between September 2024 and March 2025 due to falling gasoline consumption in the U.S., reduced power burn in the Middle East, and lower seasonal jet fuel demand. Weak demand from China is also impacting the market, with crude imports down 324,000 barrels per day year-to-date, marking the first annual decline since 2000, excluding the pandemic period.
In Asia, weak demand is affecting key oil product cracks amid tepid economic activity. Refiners in South Korea, Taiwan, and Japan are facing challenges as economic activity remains muted, with sluggish performance in manufacturing and construction sectors, along with weak goods and services exports.
Platts assessed the second-month Singapore gasoil crack swap against Dubai crude at an average of $16.77 per barrel so far in Q3, up from $16.53 per barrel in Q2 but significantly below the average of $22.12 per barrel in Q1 and the 2023 average of $22.82 per barrel.
Chinese refinery crude throughput fell 2.0% in July from June, reaching a 21-month low of 13.96 million barrels per day. This decline reflects reduced demand in Asia’s largest oil consumer, as China’s GDP growth slowed to 4.7% in the second quarter. Japan and South Korea also faced economic challenges, with Japan revising its 2024 real GDP growth forecast down to 0.1% from 0.5% and South Korea’s industrial production falling 3.7% month-on-month in July.