Crude futures have fallen to their lowest level this year, as concerns about weak global demand, including top oil importer China, coincided with a possible production boost by OPEC+ in October. November Brent fell $4.91/bbl w/w to settle at $73.75 per barrel (bbl) on September 4 to a YTD-low of $72.63/bbl while WTI also set a YTD-low, falling to $69.19/bbl.
"The fact that recent data shows no signs of any acceleration in import demand in China, Europe or North America points to a situation where the oil market is not going to be as tight as expected a few months ago," StoneX analyst Fawad Razaqzada said, as reported by Dow Jones.
Today, OPEC+ has reached a deal to delay the unwinding of its production cuts that were planned to begin in October, anonymous OPEC+ sources told Bloomberg on Tuesday. The group now plans to ease output cuts beginning in December.
Despite an intra-day jump in oil prices after the EIA crude inventory data and the OPEC+ news, crude prices quickly gave up gains, with WTI crude falling back to $69,30 per barrel and Brent falling to $72.70.
"We see OPEC+ in an unusually difficult situation since their resolve to support oil pricing is being challenged by a continued loss of market share to non-OPEC producers for a lengthy period of time," Ritterbusch analysts said, according to Dow Jones. "This implied loss of revenue when accompanied by a lower pricing environment will be upping concerns over budgetary requirements among key OPEC producers."
Meanwhile, commodity analysts at Standard Chartered have revealed that oil markets have lately been dominated by trend-following strategies overlaid with some volatile market views on U.S. macroeconomic prospects and geopolitical developments. According to the analysts, the latest slide has been magnified by the strategies of trend-following algorithmic Commodity Trading Advisors (CTAs). StanChart says this group of traders is even shorter on oil than they were at the bottom of the previous two cycles, leaving some scope for a short-covering rally. However, the experts also have also warned that CTA strategy is currently so unbendingly negative on oil that any substantial rally is likely to be followed by the CTA traders going short again.
A return of Libyan oil is not helping oil prices either, as reports emerged that progress toward a deal to resolve a dispute was being made. A couple of days ago, Sadiq al-Kabir, the former
governor of the Libyan central bank whose dismissal started the current crisis, stated that an agreement between Tripoli and Benghazi authorities was imminent and that he expected to return at the helm of the bank soon. Currently, the impasse between the two warring factions has taken off ~700,000 barrels/day of Libyan crude from the markets. StanChart is, however, more bullish on the Libyan situation, and says the reality of current negotiations is significantly more nuanced than Al-Kabir implied. StanChart points out that there is so far no actual agreement on anything substantive other than the desire to have an agreement and get oil revenues moving around the two regional economies again.
StanChart says oil market fundamentals for Q4-2024 have not shifted significantly over the past six weeks. The analysts have projected a 0.5 million barrels per day (mb/d) inventory draw for the quarter, assuming that reductions in OPEC+ voluntary cuts occur as currently scheduled. Similarly, the U.S. Energy Information Administration (EIA) model has projected an inventory draw of 0.5 million barrels/day while the International Energy Agency (IEA) model generates a 0.5-0.7 mb/d draw. Whereas these projected draws are not large, they represent a significant y/y improvement on the builds recorded in Q4-2023 with the relative improvement clocking in at 1.4 mb/d in StanChart's model and 1.3bmb/d in the EIA’s.
Copper Pullback
Copper prices have continued to pullback from their May all-time high, with prices
declining for the past six trading days to close below $9,000/t for the first time in two-and-a-half weeks. Just like in the oil markets, sentiment in copper markets remains weak, driven by soft China data and the sizable build in LME inventories. Whereas LME copper inventories have declined in recent days, they remain close to the highest level since September 2019.
In contrast, SHFE copper inventories continue their downtrend, posting an eighth w/w decline to the lowest level since March 8.
However, part of Wall Street remains bullish on copper. According to Jeffries, copper demand could come under pressure if the global economy slows down. However, the brokerage remains bullish on the metal over the medium term thanks to growing global demand coupled with significant supply constraints.
"A U.S. recession would be a clear negative. But the subsequent recovery in demand would almost certainly exceed mine supply growth, which would imply significantly higher prices in the years ahead," the investment bank said in a note dated August 26.
In the event the U.S. economy has a soft landing and Chinese demand stabilizes, Jefferies has predicted that we could soon see the next up-cycle in copper, with copper prices to average $4.40 per pound (~$9,700/t) in 2024, and $4.83/pound (~$10,645/t) in 2025.
By Alex Kimani for Oilprice.com
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