Crude oil prices declined last week, reaching their lowest in 14 months, driven by weak demand signals from China, an easing supply threat due to Libyan political turmoil, expectations of the Organisation of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+) unwinding production cuts, and poor economic data from the United States. Despite weak demand from China and uncertainty over United States economic indicators, smaller OPEC+ members are discussing the restoration of a portion of the output they had previously reduced through voluntary cut decisions.
According to Polymerupdate Research, the Brent crude contract for near-month delivery at the InterContinental Exchange (ICE) plunged to close the week at US$71.06 a barrel, down from US$78.8 a barrel at the close of the previous week, experiencing a weekly decline of approximately 10 percent, marking its lowest level since June 2023. Crude oil prices have fallen by a remarkable 20 percent over the past 12 months.
Similarly, the Western Texas Intermediate (WTI) futures for the near month delivery on the New York Mercantile Exchange (Nymex) fell by 9 percent last week to close at US$67.67 a barrel on Friday from US$73.55 a barrel on previous Monday. This level of WTI crude futures has not been seen since June 2023. WTI oil saw its third straight weekly loss.
“A relief rally in oil amidst the recent sell offs cannot be ignored in case of any significant geopolitical or Hurricane-led disruptions or a sudden reversal in economic data. This week we have monthly outlook from OPEC+, the United States Energy Information Administration (EIA) and the International Energy Agency (IEA) along with trade data from China and any supportive trigger from the same could bring some respite to oil prices. However, persistent concerns over weak demand from China and the United States would keep the broader outlook bearish for oil,” said a report from AnandRathi Investment Services.
Fundamentals feeblenessChina’s August’s economic data showed the manufacturing sector hit a six-month low, with a noticeable decline in new export orders. The weakness in the economic sentiment in China, which started approximately three years ago with the collapse of the sectoral giant Evergrande, continued even today. Additionally, the United States saw a weaker-than-expected job growth in August, raising concerns about the broader economic slowdown, thereby denting oil demand. Libya’s resumption of some domestic oil production also weighed on prices, with ongoing political developments signalling the potential for further increases in supply
Average hourly earnings for all employees on United States private nonfarm payrolls increased by 14 cents, or 0.4 percent, to US$35.21 in August 2024, following a 0.2 percent rise in July and slightly above forecasts of a 0.3 percent rise. In August, average hourly earnings of private-sector production and nonsupervisory employees increased by 11 cents, or 0.4 percent, to US$30.27. In early August, United States job data came in lower than expected, prompting the market to trade based on recession concerns again. Following the release of the U.S. Federal Reserve’s July monetary meeting minutes, the market became convinced that a rate cut in September was imminent, and the U.S. dollar index hit a new low of 105.51 in 2024.
The United States economy added 142,000 jobs in August 2024, more than a downwardly revised 89,000 in July but below forecasts of 160,000. Job gains occurred in construction (34,000); health care (31,000), namely ambulatory health care services (24,000); government (24,000); and social assistance (13,000). In contrast, employment declined in manufacturing (-24,000), reflecting a drop of 25,000 in durable goods industries. US labour market data was weaker but cast doubts on a 50 or 25 basis points (bps) interest rate cut by the Federal Reserve (Fed) at the September meeting.
In the geopolitical space, US Secretary of State Antony Blinken said, approximately 90 percent of the Gaza ceasefire agreement is agreed upon, but critical issues remain where there are gaps. However, uncertainty surrounding the United States presidential election in November is expected to be significant, as global risk appetite may be subdued and could potentially delay government stimulus in China, according to Citigroup Inc. Talks about a ceasefire in Libya may restore approximately 1 million barrels of production disruption and boost global supply.
Rahul Kalantri, VP Commodities, Mehta Equities Ltd, stated, “Crude oil prices declined due to demand concerns and a broader sell-off in global financial markets. The United States non-farm employment data fell short of expectations, further exacerbating worries about demand. Last week's economic data from China was disappointing, with manufacturing activity contracting for the sixth consecutive month in August. As the second-largest consumer of crude oil, China's downturn added pressure to prices. The anticipated resumption of Libyan oil production following the resolution of disputes also weighed on the market. However, a larger-than-expected decline in U.S. crude oil inventories and OPEC+'s decision to defer a production hike provided some support, helping to stabilise prices at lower levels.”
Citi forecasts crude @US$60Citibank, an American multinational investment bank and financial services company, forecasts that international crude oil prices will plunge to US$60 a barrel due in the medium term. The New York-headquartered bank also projects a further decline in crude oil prices towards US$50 a barrel, driven by financial flows, before a potential rebound.
In a note to clients, Citigroup stated that ongoing geopolitical tensions have been temporarily raising oil prices, but each rebound has been weaker than the last. “The market now seems to understand that geopolitical tensions do not immediately lead to supply disruptions. Therefore, every major Israel-Gaza development presents an opportunity to sell on the temporary upswing,” the note added.
DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
