The price of crude oil fell to its lowest level in three years on Tuesday, 10 September 2024 as a negative market sentiment overpowered traders.
WTI crude dropped by more than 4%, to $65.75 a barrel. Brent crude fell to $69.19 a barrel.
The steepest decline in oil prices since the end of 2021.
The market participants react to several factors including disruptions in supply and concerns about economic instability.
The price reduction coincided with Donald Trump’s and Kamalah Harris’ highly anticipated US Presidential debate.
Investors worry about the impact of the US election on the global economy and US energy policy.
Oil markets are dominated by a bearish mood
Hedge funds and money managers have a record level of negative sentiment, which is driving the current oil market decline.
According to the Commodity Futures Trading Commission, speculative position in WTI and Brent are at multi-year highs.
As of September 3, 2024 the net speculative positions (which reflect bets made on price increases) have fallen to 139.242 lots, their lowest level since 2011.
In the last eight weeks, traders sold an astonishing 311.2 million barrels crude oil.
Standard Chartered analysts report that the crude oil positioning index reached -100.0 in 2024 for the first ever, indicating extreme pessimism.
Analysts warn that low index scores can often be a precursor to price increases, as was seen in December 2023, when prices soared.
Fears of an oil surplus are unfounded
Many experts, despite the current bearish sentiments, believe that fears of an oil surplus have been exaggerated.
Although there are valid concerns about the slowing of demand in key markets such as China, the fundamental balance between supply and demand does not support extreme negativity on the market.
US Energy Information Administration reported that crude oil stocks in the United States have dropped by 1.816 millions barrels per day (bpd), signaling tightening of supply.
EIA continues to forecast that supply shocks may push prices above $80 per bar in the next few months.
Supplies disrupted in Libya and Gulf of Mexico
Global oil supply has also been affected by disruptions to key regions.
A standoff in Libya between the Haftar family and the Central Bank blocked oil exports during the past two weeks. This has reduced crude production from 1,15 million bpd to only 230,000 bpd.
Es Sidra, Ras Lanouf and other key export terminals remain closed. This has tightened global supply.
In the Gulf of Mexico Tropical Storm Francine caused widespread evacuations of oil platforms offshore, temporarily reducing output by over 400,000 Bpd.
OPEC+ Struggles for Prices Support
OPEC+ took steps to support the prices. This included delaying a production increase originally planned for October of 180,000 bpd.
In an effort to stabilize the market, the group has delayed this increase to December.
The market reaction was muted and the prices continued to fall below $70 a barrel.
OPEC+ has also revised their oil demand forecasts for 2024 and 2025, reducing the earlier estimates to 1,74 million bpd.
Although the demand for goods and services is expected to increase, it will not reach earlier expectations.
What is the impact of China on oil prices?
The slowdown in China’s economy is a major worry for the global oil market.
This year, the world’s biggest crude oil importer saw a steep decline in demand growth. Part of this is due to the aggressive push by the country towards electrifying their transport sector.
China’s oil consumption has been increasing by between 500,000 and 600,000 barrels per day (bpd) annually. However, this figure is now down to about 200,000 bpd.
China’s oil exports for the first seven of 2024 were 320,000 bpd less than the same period in 2017.
The demand for oil in China could continue to decline over the next few years as China struggles to reach its 5% economic growth target and electric vehicles become more popular.
Potential impact of US Energy Policy
The US Presidential election is also likely to have significant effects on the oil market.
Donald Trump pledged that if he is elected, he would deregulate US shale-oil sector in order to increase production and reduce gasoline prices.
Analysts point out, however, that US shale production is already at near-record levels. Further increases in output would only exacerbate this glut and push prices lower.
Trump’s plans for increased oil production could not be economically viable as WTI prices below or around $60 per barrel may make certain US shale operations infeasible.
A market already oversupplied with products could see further price drops, adding additional pressure to producers.
A volatile market ahead
WTI crude prices have fallen over 21% since the beginning of July. Technical analysis indicates that further drops could be on the way.
If prices drop below this level, they may fall as low as $60.
To the upside, prices will need to move above $75 in order to indicate a possible recovery.
The Federal Reserve and upcoming economic data in the United States will have a significant impact on short-term price movements.
Some analysts believe that despite the fact that prices have fallen to levels not seen in years, the market is oversold.
Hedge funds and money managers’ extreme positions suggest that traders could experience a price recovery if they begin to reassess supply-demand.
Prices should be supported in the short term by the supply disruptions in Libya, the Gulf of Mexico and OPEC+ production cuts.
The outlook for the oil demand could also be improved by the possibility of a Chinese demand recovery, even though it is uncertain.
Investors should be cautious, however, because the market is rife with uncertainty.
The result of the U.S. Presidential election could have profound effects on global oil production and energy policy.
The oil demand will be challenged by the slowdown in China’s economy and global shift to renewable energy and electric cars.
Let’s not forget the ongoing conflict in the Middle East, which doesn’t seem to be slowing any time soon. This will only exacerbate the dire outlook for crude oil prices on a long-term basis.
What’s next after Crude oil prices plunge to 3-year low amid global fears? This post may be updated as new information becomes available
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