What Is Behind Recent Sharp Declines In Oil Price Comments From Noor Capital

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By Mohamed Hashad, Chief Market Strategist, Noor Capital

What is Behind Recent Sharp Declines in Oil Price:

On Friday, Brent finished at its lowest level since December 2021, down to $70.6 per barrel-its lowest level since March 2023. WTI dropped to $67.2, a 14-month low. Brent saw a weekly loss of about 10%, which was made worse by the contract rollover at the beginning of the month. The decrease is 7.6% when this component is taken out, which is the biggest weekly decline since October 2023.

WTI's weekly loss was 8%, a level last observed around 11 months ago. The price differences along the forward curves, or time spreads, also saw a discernible shrinking, but it was much more pronounced for Brent. Less than $1 separated the closest contract from the one that expires in six months on Friday, and there were just 35 US cents separating the first two Brent forward contracts.

This year, the premiums for short-term delivery of oil have never been cheaper. As a result, traders are far less anxious about the oil market than they were a few weeks ago. Speculative investors' actions, which showed a large reduction in their net long holdings in Brent and WTI in the week ending September 3, similarly mirror this. Data from the CFTC and ICE show that during the most recent reporting week, they collectively dropped to their lowest point of the year.

The following factors, combined, have created a bearish outlook for oil prices in the short term.

Economic Concerns: Weaker economic data from the U.S. and China has raised fears of a potential recession, leading to reduced demand expectations.

Market Sentiment: Negative sentiment in the stock market has spilled over into commodities, including oil.

Geopolitical Developments: Ceasefire talks in the Middle East have reduced the risk of supply disruptions, further easing prices.

Stronger Dollar: A stronger dollar makes oil more expensive for other countries, which can decrease demand.

USA:

U.S. Energy Inventories.

Crude Oil Inventories: As of early September 2024, U.S. crude oil inventories have seen fluctuations. The latest data from the U.S. Energy Information Administration (EIA) reported a slight increase in crude oil stocks, which stood at approximately 420 million barrels. This increase is partly due to lower refinery runs and higher imports.

Gasoline Inventories: Gasoline stocks have also been volatile. In August 2024, gasoline inventories were reported at around 220 million barrels, reflecting a decrease due to higher summer driving demand.

Distillate Fuel Inventories: Distillate fuel inventories, which include diesel and heating oil, were reported at about 130 million barrels in early September 2024. This level is slightly below the five-year average for this time of year, indicating tighter supply conditions.
Strategic Petroleum Reserve (SPR): The SPR, which is a critical buffer for the U.S. in times of supply disruptions, holds around 350 million barrels as of September 2024. The SPR levels have remained relatively stable, with no significant releases in recent months.

These inventory levels are crucial indicators of supply and demand dynamics in the U.S. energy market. They help analysts and policymakers understand market trends and make informed decisions.

The USA continues to be a significant player in the global oil market:

Production Levels: The USA remains one of the largest oil producers. In August 2024, U.S. crude oil production was stable, but market sentiment was affected by economic concerns and weaker-than-expected manufacturing data.

Strategic Petroleum Reserve (SPR): The U.S. government has not made significant releases from the SPR recently, focusing instead on maintaining reserves amid fluctuating prices.

Policy Decisions: U.S. energy policies continue to influence global markets. Recent economic data showing slower manufacturing growth has contributed to a bearish outlook on oil demand.

China

China's role as a major consumer remains crucial:

Demand: China's economic performance significantly impacts global oil demand. In August 2024, manufacturing activity in China fell to a six-month low, raising concerns about reduced oil demand.

Strategic Partnerships: China has increased its oil imports from Russia, helping to offset the impact of Western sanctions on Russian oil2. This partnership remains vital for both countries.

Russia:

Russia's position as a key exporter continues to shape the market:

Sanctions and Exports: Russia has redirected its oil exports towards Asia, particularly China and India, due to Western sanctions2. This shift has been essential for maintaining its oil revenue.

Production Adjustments: Russia's production levels, often coordinated with OPEC+, have been crucial in managing global supply. Despite sanctions, Russia has maintained significant export levels2.

OPEC+

OPEC+ has played a pivotal role in stabilizing the market:

Production Quotas: OPEC+ has delayed planned production increases to counteract the recent price declines. In August 2024, global oil supply rose slightly due to a substantial OPEC+ increase.
Market Stabilization: By adjusting production levels, OPEC+ aims to balance supply with global demand. The group's decisions have been influenced by weaker economic data from major economies like China and the USA.

Recent Market Data:

August 2024: Oil prices experienced significant volatility. Brent crude futures tumbled by $6 per barrel during July, influenced by weak macroeconomic data and geopolitical tensions3. By the end of August, Brent crude was trading at around $80 per barrel.

September 2024: Oil prices continued to decline, with Brent crude falling below $75 per barrel and closing at $71.45 on September 95. This decline was driven by weakening global demand and signs of oversupply.

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