In a challenging turn of events for the oil market, prices are poised for a fourth consecutive weekly decline, slipping into bear territory and presenting a significant dilemma for OPEC+ leaders slated to reassess production targets later this month.
While West Texas Intermediate showed a glimmer of recovery on Friday with a 2.8% uptick, prompted by optimism from Goldman Sachs Group Inc. analysts anticipating OPEC intervention to bolster prices, the US benchmark still heads for a weekly loss of approximately 3%. This decline marks a broader descent of around 20% from the peak levels witnessed in September.
The oversupply of oil has defied expectations, leading to a gradual softening of prices in recent weeks. Anticipated increases in shipments from Guyana and the North Sea next month, coupled with surging US exports, contribute to this trend. Algorithm-driven traders exacerbated the slump by intensifying sell-offs following Brent’s dip below $80 on Thursday.
The surge in volumes adds complexity to the outlook for the upcoming meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its allies. Despite assurances from Saudi Arabia and Russia, the group’s major producers, committing to maintaining additional output cuts until year-end, Russia’s crude exports have seen a recent uptick, introducing uncertainty.
Technical factors have also played a role in the current downturn. Key market indicators are trading in a bearish contango structure for the first time in months, and the breach of the 200-day moving average in recent days has further heightened selling pressure.
Rebecca Babin, a senior energy trader at CIBC Private Wealth, remarked, “Crude bulls were taken to the proverbial woodshed this week as the commodity experienced a frictionless selloff that occurs when bulls lose conviction and macro-driven traders catch a whiff of deflation.” She anticipates volatile markets and low trading volumes in the near term as consensus shifts towards extending voluntary cuts through at least the first quarter.
Earlier in the week, US inventory data revealed a significant uptick in stockpiles, particularly at the key storage hub of Cushing, Oklahoma. These buildups coincide with seasonal maintenance at refineries, reducing their demand for crude, while overseas shipments continue to rise in tandem with increasing US production.
The International Energy Agency’s announcement earlier this week, highlighting unexpected production growth, dampened earlier expectations of a tight global market this quarter.
Adding to the downward pressure on prices, despite the ongoing Israel-Hamas conflict, is the shifting dynamics in options trading. Traders, who initially took bullish positions when the conflict erupted, are now paying higher premiums for bearish options to hedge against further declines.
Nevertheless, some analysts remain optimistic that the current weakness in prices will be short-lived, emphasizing OPEC’s commitment to defending prices. Goldman Sachs analysts, including Daan Struyven, stated, “We believe that OPEC will ensure that Brent oil prices end up in a $80-to-$100 range in 2024 by ensuring a moderate deficit and leveraging its pricing power.” They attributed the recent selloff to non-OPEC supply surpassing expectations.
The demand outlook further clouds the picture. Chinese figures, representing the world’s largest crude importer, reveal a reduction in daily processing rates in October as apparent oil demand declined from the previous month. Concurrently, US unemployment benefits have surged to the highest level in almost two years, signaling a slowdown in the world’s largest crude consumer. As the oil market navigates these challenges, industry participants are keenly watching OPEC’s decision-making later this month for potential stabilization measures.
In the midst of uncertainties, the global oil market faces a pivotal crossroads, marked by its fourth consecutive decline, prompting heightened anticipation for the upcoming OPEC+ decisions that could reshape the trajectory of this intricate economic landscape.
Source: Bloomberg
