Oil was looking into the abyss and falling. Crude oil futures (both Brent as West Texas) accumulates a decline that already exceeds 16% in two months (since the beginning of July). This decline is somewhat surprising, because it occurred in a tight physical market (spot oil) and with a drop in stocks. What is more, the collapse of crude oil was accompanied by a market in a structure of deportation (physical crude oil is more expensive than futures contracts), suggesting that at this point in time demand is still stronger than supply. However, The perfect storm brewing in the oil market has already caused a sharp drop in prices which could get worse if it finally explodes. The dark clouds that make up this storm are powerful: the beginning of the end of OPEC cuts (supply increases), the likely return of the Libyan oil market (supply increases), the notable slowdown of the Chinese economy (supply decreases). and the risk of a recession in the West (this would also reduce demand). If all these risks end up materializing, the oil market could find itself upside down. The year that was supposed to be bullish could turn out to be quite the opposite.
Of course, all these risks might not materialize or might only materialize halfway, but so far the market seems to be pricing them in very seriously. The barrel of Brent fell to $72.8 on Wednesdaylows not seen since June 2023, more than a year ago. All this, while tensions in the Middle East remain relatively high and the physical crude oil market remains tight due to the reductions still maintained by the Organization of the Petroleum Exporting Countries (OPEC).
Analysts show surprise at the sharp drop in crude oil prices, something is not adding up, it seems the market knows something the rest of the world does not and is discounting it from the price of oil. “This is a market that is reluctant to react to bullish news… There was no price support last week when Libya was forced to shut down production and severely restrict exports, but the agreement to appoint a central bank governor was greeted with a massive sell-off which has caused the price of Brent to fall to its lowest level this year and that of gasoline futures to a level close to the lowest of 2021,” he comments impressed. Tamas Varga, analyst at PVM Oil.
Disastrous repercussions for oil
“Of course, the resolution of friction between the two legislative bodies in Libya (the country is divided in two) to appoint a central bank governor has only amplified the already existing concerns about oversupply,” Varga comments. The fact is that oil barely reacted when Libya, which produces a million barrels per day (a significant amount), stopped production at several oil fields. Now, with news that these fields could soon be operational again, oil is in free fall.
“Those leading the current bearish movement are making a judgment call that the OPEC+ group of producers (OPEC plus Russia) will continue with its plan to reverse its 2.2 million barrels per day (or bpd) production cuts starting in October. What they are failing to take into account is that recent oil losses will make it increasingly difficult for producers to stick to that plan. It is increasingly likely that the proposal will be shelved, even if the silence of the producers’ alliance is worrying and deafening“If they decide to add another 180,000 b/d to the market, the repercussions will be disastrous and new weakness will occur,” Varga warns.
The drop in crude oil prices on expectations of increased supply has perfectly complemented concerns about the health of the global economy, the PVM Oil analyst said. While China’s problems have been in the spotlight for the past few months (Caixin’s services PMI index declined in August), the latest data on the US manufacturing sector has raised the prospect of another economic slowdown.
In a report released in late August, Goldman Sachs predicted a “sharp slowdown” in China’s oil demand, driven largely by the shift from oil to natural gas and electricity via electric vehicles. China is the world’s largest oil importer and the second consumer.
Oil to flow into Libya again
Andy Lipow, president of Lipow Oil Associates, explains to CNBC that it is also likely that the political solution in Libya will be resolved, restoring the country’s production, which had been cut by 700,000 barrels per day. Libya’s oil reserves are the largest in Africa and its potential production is also in the “top 3”.
According to Argus, Libyan production would be 300,000 b/d this week, an amount that barely covers the country’s domestic demand, so exports would have stopped dead. However, since Bloomberg They insist on what was mentioned above, namely that the agreement on the election of a central banker could “unlock” hundreds of thousands of barrels of oil.
Finally, technical analysis (interpreting charts through investor sentiment) is not helping oil either. “Technically, it is important to pay attention to the evolution of the Brent futures price in the short term, as it tests the strength of the key support found at $72-74. Whether this support holds depends on whether the risk does not increase of being able to witness a broader corrective process, which in the worst case could take the Brent price to $55, which would confirm if a decline breaks through supports at $67, 10% away and it would be the minimum target of fall to miss 72-74 dollars,” explains Joan Cabrero, advisor of EcoTrader, in statements to elEconomista.esThe perfect storm could bring crude oil to levels almost unseen since the covid-19 crisis.
