Crude oil market prices are under increasing downward pressure, with the price breakout suggesting further weakness is to come.
BCA Research analysts in a note dated Friday highlight the factors contributing to the recent collapse in oil prices and signal that the worst may not be over.
Investors are being urged to reduce their exposure to oil as market fundamentals suggest prices will continue to decline over the next six to nine months.
One of the main factors contributing to the drop in crude oil prices is the downward revision of forecasts for global demand.
Major organizations such as the International Energy Agency (IEA), the US Energy Information Administration (EIA) and OPEC have cut their oil consumption forecasts for 2024 and 2025.
This marks a reversal of the climate from earlier, more optimistic forecasts. In addition, prominent Wall Street banks such as Goldman Sachs, Morgan Stanley and Citi have lowered their Brent crude price targets.
This pessimism is supported by weaker-than-expected demand data. In the first half of 2024, growth in global oil consumption reached its lowest level since 2020, mainly due to reduced economic activity and lower demand from key markets, notably China.
China’s reduced crude oil imports in August, down 7% from a year earlier, have heightened fears about global demand.
While demand is weakening, supply dynamics have also played a role in squeezing prices. Production from non-OPEC countries such as Brazil, Canada and the US has skyrocketed, more than offsetting OPEC+ production cuts.
An increase of 1.5 million barrels per day (b/d) from these non-OPEC countries overshadowed a 1.2 million b/d decline in OPEC+ production.
The result has been a flattening of the oil futures curve, indicating a waning of enthusiasm for short-term contracts. The price spread between spot and futures has narrowed, reflecting growing market concerns about oversupply in the face of falling demand.
While the outlook for crude oil prices remains bearish, there is potential for a short-term recovery.
Fund managers have shed oil long positions, with net long positions in both Brent and West Texas Intermediate (WTI) hitting record lows.
Historically, such low net long positions are followed by price rallies, raising the possibility of a short-term recovery.
However, BCA Research stresses that any potential rally will likely be short-lived. “Even in cases where prices rose, the average duration of the 23-day rally is relatively short,” the analysts said.
The absence of strong fundamental catalysts for sustainable demand growth further reinforces the view that any price recovery will be temporary.
From a cyclical perspective, the path of least resistance for oil prices remains to the downside. Historically, oil prices tend to weaken during the fourth quarter, a period characterized by lower demand after the summer driving season.
Refineries typically perform maintenance during this period, leading to an increase in crude inventories, which puts additional downward pressure on prices.
In addition, the broader economic outlook is not favorable for crude.
“Strategists at BCA Research assign a high probability of an economic downturn over the next 12 months. Thus, global demand conditions for crude oil are likely to deteriorate further,” the analysts said.
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Written by D Fernando
