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Fluctuations in the crude oil market
The Organization of the Petroleum Exporting Countries (OPEC) has revised down its oil demand growth forecast in its latest monthly oil market report, sparking market concerns. At the same time, the tense situation in the Middle East continues to attract attention, and future crude oil market volatility may intensify.
Declining demand expectations dampen market sentiment
On October 14th local time, OPEC released its monthly oil market report, revising down its expectations for global oil demand in 2024 and 2025. This marks the third consecutive time that OPEC has revised down its global oil demand expectations for the current and next year.
According to the report, OPEC adjusted its expectation for the global daily average oil demand growth in 2024 from 2.03 million barrels to 1.93 million barrels compared to the previous year, with the adjusted annual average daily oil demand forecasted at 104 million barrels. OPEC stated that this adjustment is based on the actual data received by the organization and the downward revision of oil demand expectations in some regions. The adjusted expectation for the global daily average oil demand growth in 2024 is still significantly higher than the historical average of 1.4 million barrels before the COVID-19 pandemic.
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OPEC also revised down its expectation for the global daily average oil demand growth in 2025 from 1.74 million barrels to 1.64 million barrels compared to the previous year, with the adjusted annual average daily oil demand forecasted at 106 million barrels.
OPEC's latest monthly report has also led most crude oil futures traders to begin to believe in the "oversupply" view of oil proposed by Wall Street giants such as Goldman Sachs and Morgan Stanley—that is, starting from 2025, the oil market will face a continuous situation where supply exceeds demand, leading to sustained weakness in crude oil prices.
Affected by this news, market sentiment was under pressure. As of the close on the 14th, the price of light crude oil futures for delivery in November at the New York Mercantile Exchange fell by $1.73, closing at $73.83 per barrel, a decrease of 2.29%; the price of Brent crude oil futures for delivery in December fell by $1.58, closing at $77.46 per barrel, a decrease of 2.0%.
It is worth noting that prior to this, the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) respectively revised down their estimates for global daily oil consumption in the fourth quarter by 140,000 barrels and 200,000 barrels. Later this week, the IEA will also update its monthly market report, which is expected to further revise down its outlook forecast.
According to Reuters, with the consecutive three downward adjustments to overall oil demand expectations, OPEC has finally begun to abandon the strong bullish attitude it has held since the beginning of this year. "The decline in demand is indeed worrying, indicating that oil prices will continue to weaken in the future," said Sparta Capital Securities analyst Peter Cardillo in a statement.
In early September, OPEC issued a statement saying that eight OPEC and non-OPEC oil-producing countries decided to extend the voluntary production reduction measures of 2.2 million barrels per day, which were originally due to expire at the end of the month, until the end of November. Starting from December, they will gradually withdraw this reduction in production, but the pace of withdrawal will be flexibly adjusted according to market conditions.Middle East Tensions Raise the Risk of Oil Price Surges
The recent rapid escalation of the situation in the Middle East has intensified global market concerns about disruptions to oil supplies, causing international oil prices to rise. Although relatively weak global demand has somewhat curbed the rise in oil prices, uncertainties in the supply chain and geopolitical risks continue to provide support for oil prices.
Due to market concerns that Israel may launch airstrikes on Iranian oil facilities, international oil prices have risen accordingly. On the 7th, the futures price of Brent crude oil in the North Sea of the UK broke through the $80 per barrel mark for the first time since August. Iran is an important global oil producer and controls the key oil transportation channel, the Strait of Hormuz. If conflicts continue to escalate and lead to blockages in this channel, major Eurasian oil-importing countries will have to seek alternative supplies, which will further push up global oil prices.
Citi analysts, including Francesco Martoccia, stated in a report on the 14th that they have raised the expected price in the bullish scenario for Brent crude oil in this quarter and the next from $80 to $120 per barrel. The probability of the bullish scenario being realized has increased from 10% to 20%. Citi said that due to the underlying weakness in the potential oil market fundamentals, the base case expectations for oil prices in the fourth quarter and the first quarter of next year remain at $74 and $65 per barrel, respectively, with a 60% probability of realization; the bearish scenario expectations for the fourth quarter and the first quarter of next year are $60 and $55, respectively.
The Economist, a UK weekly magazine, recently published an analysis suggesting that if supply disruptions lead to a shortage, oil prices may first rise to a level high enough to suppress demand and then begin to fall. Once crude oil prices reach $130 per barrel, close to the historical high in 2022, it will trigger "demand destruction."
Although the global economy's dependence on Middle Eastern oil is not as high as in the past, and global oil demand is relatively weak, severe supply disruptions can still lead to rising energy prices and increased inflation, sending shockwaves through the global economy. Professor Hrvoje Krasic from the University of Zagreb in Croatia stated that if a larger-scale conflict occurs in the Middle East, oil prices will inevitably rise sharply, and the European economy will suffer significant losses. With weak economic growth in Europe, rising energy prices will inevitably increase the risk of falling into a growth stagnation, and inflation will rebound and rise.
Tamas Varga, a senior market analyst at PVM Oil Associates, an oil broker, stated that an attack on Iranian oil facilities or the interruption of traffic in the Strait of Hormuz would severely disrupt the supply and demand situation, pushing oil prices to break through $90. This is undoubtedly bad news for central banks that are just beginning to shift their monetary policy, as the impact of energy inflation over the past two years has been profound.
Oil Market Volatility May Intensify
Currently, there are analyses suggesting that although oil prices have fallen back, the complex and changing situation in the Middle East may still lead to significant fluctuations in international oil prices.
According to a report by CNBC, Daniel Yergin, Vice Chairman of S&P Global and an energy expert, stated that due to the ongoing escalation of tensions in the Middle East, the global economy is entering an unprecedented special period. Bjarne Schieldrop, Chief Commodity Analyst at Nordea Bank in Sweden, stated that if the situation worsens and the Strait of Hormuz is closed for a month or longer, Brent crude oil prices may soar to very high levels, and the world economy will be in trouble.However, Schneider Electric's global commodities analyst, Robbie Fraser, stated that while geopolitical risks have pushed oil prices above $70 per barrel, concerns about demand continue to limit further increases in oil prices, and the overall global economic environment still suppresses oil prices.
Research reports recently released by Morgan Stanley and Goldman Sachs both show that it is expected that after the end of 2024 or the beginning of 2025, the entire oil market may shift from a slightly tight supply-demand balance to a potential surplus. Goldman Sachs even predicts that Brent crude oil trading prices may fall to a low point of $61 per barrel.
Analysts believe that the supply and demand sides of the oil market are still in a game. The supply side still has good news in the short term, with expectations of tightening oil supplies, coupled with the start of the winter heating season, energy demand will increase, so the possibility of a sharp drop in oil prices in the short term is not great. The demand side is the main driver suppressing oil prices. The global economy is showing a trend of slowing down and facing increasing pressure of recession, which may be the main factor constraining oil prices in the medium and long term. Overall, the crude oil market will intensify fluctuations against the backdrop of increased supply-demand game.
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