Trading Signals 05/02 – 09/02
Oil Price Drop: Causes and Forecast
Over the last four days starting from November 6th, the prices of North Sea Brent crude oil have experienced a 10% decline, briefly falling below the psychologically significant threshold of $80 per barrel. This recent trend sharply contrasts with the earlier predictions of experts who had anticipated oil prices reaching $150 per barrel.
The drop in prices is being attributed to the slowdown in the economies of China, the European Union, and the United States, which are major consumers of oil. However, these economies have been experiencing a slowdown or even stagnation for several months, and the significant decrease in oil prices only occurred this week. This suggests that there are other factors influencing the oil market.
Optimistic forecasts from analytical agencies were primarily based on two factors: the policies of OPEC+ and concerns among market players about the potential escalation of conflicts in the Middle East, including the involvement of new parties. However, such sentiments have diminished recently.
The global oil market has shown a mix of unpredictability and predictability. On one hand, major oil-producing countries like Saudi Arabia and Russia have officially announced the extension of voluntary oil production cuts until at least the end of this year. One might have expected this move to lead to a significant increase in oil prices. However, the market has only responded with a modest rise in oil prices.
According to reports from the Energy Information Administration (EIA), there is currently an oversupply of oil production compared to global consumption. This oversupply has resulted in excess inventories, which are putting pressure on prices. Additionally, it is expected that these surpluses will continue to accumulate, worsening the price situation in 2023-24.
A similar situation with oil inventories exists not only on a global scale but also within the United States, which is the world’s largest consumer of crude oil. According to EIA data, over the past four weeks, crude oil inventories in the country have collectively increased by almost 8 million barrels.
Crude Oil Inventory Statistics in the United States (EIA Data)
Data on inventories in the United States, indicating an unexpected increase, further confirm the lack of demand pressure. This is exacerbated by the fact that even now, during the period of seasonal fuel demand growth, the increase in oil and gasoline inventories remains below expectations.
The American factor doesn’t stop there. The United States continues to increase domestic oil production, thereby contributing to the growth in oil supply in the global market, partially offsetting the volumes of Russia and Saudi Arabia. This contributes to the decrease in prices.
In addition to this, economic indicators such as the slowdown in job growth in the United States also signal a potential economic slowdown, which, in turn, may lead the Federal Reserve to reconsider its monetary policy towards easing. This will inevitably have an impact on the dollar exchange rate and commodity prices denominated in American currency.
The geopolitical situation, which has traditionally been a source of uncertainty for oil markets, has recently shown some signs of stabilization. Reduced geopolitical tensions in key regions such as the Middle East reduce the risk of supply disruptions, which also contributes to price moderation. However, at any moment, fresh news, for example, about the potential involvement of Iran in the conflict, could have the opposite effect.
Finally, overall sentiments in the oil market are currently leaning more towards pessimism, driven by weakening demand prospects from the world’s largest economies and expectations regarding future moves by OPEC+. All this uncertainty only adds to the volatility in the oil market.
On 9 November, 2023, oil prices made a tentative effort to recover but didn’t receive much support from a wide range of investors. This sign of weakness raises concerns about the short-term prospects for the oil market.
Today, before the weekend, Brent futures prices may see some support as short positions are closed. Even if the downward trend continues in these circumstances, the outlook for oil prices in the coming weeks may be adjusted downward.
However, looking several months ahead, there is currently no compelling reason to anticipate oil prices falling below $80 per barrel. Such a scenario could prompt a response from OPEC+ countries, which have the means to stabilize prices.
The primary risk still lies on the demand side: the global economy is still adapting to high key interest rates, and the most significant negative impact may lie ahead. Weaker economic conditions can have a substantial impact on fuel demand.
This week, the market closely monitored data from China, which had high expectations for demand growth in 2023. October saw a decline in export volumes and deflation for the month. While oil import volumes remain consistently high, the broader economic slowdown does raise doubts about forecasts for 2024.
In this context, the upcoming forecasts from the IEA and OPEC, set to be published next week, will be of significant interest. Market participants pay close attention to the insights provided by these analytical organizations.