Brent crude oil spot prices have been softening this month amidst fears in the market of weakening oil demand especially in the world’s second-largest economy, China, which will result in excess supply of this commodity. After averaging $84 a barrel from January to August, prices fell to lows of $69 a barrel in the second week of this month, levels last seen three years ago in August and December 2021.
The question naturally is whether this is a temporary blip or signals a more persistent downtrend. The fact that demand is indeed weakening has led the oil cartel Opec and the International Energy Agency to lower their forecasts for 2024. This is largely on account of the dragon’s oil consumption facing headwinds with the latest monthly data indicating a slowdown in diesel demand, jet fuel consumption, refinery runs, and transition to cleaner fuels.
In its latest monthly report, Opec lowered the growth in Chinese demand to 650,000 barrels per day from 700,000 bpd this year. Demand growth in advanced countries in any case is extremely limited.
The sharp fall in prices has also led Opec and its allies to delay plans to pump more oil and extend their additional production cuts of 2.2 million bpd for two more months until end-November. To prop up prices, Opec and its allies have been reducing output since November 2022, which has taken 5.3 million bpd or 5.2% of global supply out of the market. At a time of weakening global consumption, such a strategy of the oil cartel, however, is unlikely to be efficacious as the world is awash in oil due to rising supplies from the US, Canada, Guyana, and Brazil.
There is record production in the US amidst a wave of consolidation by Big Oil although there are concerns currently over the hit to offshore production due to the tropical storm Francine in the Gulf of Mexico. The fact that production cuts by Opec and its allies are more than offset by higher non-Opec supply clearly points to the cartel’s weakening grip over the oil market.
Looking ahead, what indeed is the outlook for Brent crude oil spot prices? The market expectations around the weakening of global oil demand are obviously not an augury for any imminent price rally.
But the US Energy Information Administration (EIA) in its latest short-term energy outlook has a different take on this matter as it expects oil prices to rise in the coming months. Although prices have fallen this month, the agency expects them to soon recover, driven by ongoing withdrawals from global oil inventories due to production cuts by Opec and its allies. In fact, more oil will be taken out of inventories in the last quarter of this year, taking prices to average $82 a barrel in December.
EIA thus expects Brent crude oil spot prices to soon return to the range of $80 to $90 a barrel during the first eight months of this year. Another source of potential upward pressure on prices is the geopolitical tensions in West Asia which is the major oil-producing region.
There has so far not been a flare-up in global oil prices, reflecting the market’s assumption that they would be contained and not engulf the region. But all bets will be off if that happens. But for now, the drop in oil prices this month largely reflects demand-supply imbalances.