Oil prices fell sharply on Tuesday amid strong supply, demand concerns and speculative sell-offs. Brent crude oil futures closed down 3.69% to 69.19 US dollars/barrel in November, a new low since December 2021; WTI crude oil futures closed down 4.31% to 65.75 US dollars/barrel in October, a new low since May last year.

Strong bearish sentiment in the market, technical patterns send uncertain signals

It is worth mentioning that speculators' current net long positions in crude oil are at their lowest level on record, which indicates that the decline in oil prices is partly driven by major changes in financial positions. According to data from the US Commodity Futures Commission (CFTC), the total net long positions on Brent crude oil and WTI crude oil were only 139,242 lots in the week ending September 3.

The technical pattern of market prices has also sent uncertain signals. Some analysts pointed out that the history of breaking the balance after the 50/100/200 moving average converged has basically been accompanied by a sharp drop in oil prices. And the contraction triangle that began in 2023 also broke down last week, opening up more room for the downside. If the historical pattern is established, oil prices may fall to the $50 or even $30 range in the next few months.

OPEC and EIA have successively lowered oil demand growth forecasts

On September 10, OPEC predicted in its monthly report that global oil demand will grow by 2.03 million b/d in 2024 and 1.74 million b/d in 2025, lower than the previous estimates of 2.11 million b/d and 1.78 million b/d, respectively. This is the second time in two months that OPEC has lowered its demand forecast.

However, OPEC's forecast for global oil demand this year is far higher than the expectations of other forecasting agencies. OPEC said oil demand is still at a healthy level, far above the pre-pandemic historical average of 1.4 million b/d, thanks to strong air travel and road traffic, as well as healthy industrial, construction and agricultural activities in non-OECD countries.

Meanwhile, the US Energy Information Administration (EIA) lowered the 2024 global oil demand growth forecast to 1 million b/d and the 2025 global oil demand growth forecast to 1.5 million b/d. The EIA also said that US oil consumers are expected to stabilize at 20.3 million b/d in 2024, while the agency last month predicted a 1% year-on-year increase.

Global economic growth prospects heighten demand concerns

Recently, market concerns about a slowdown in global economic growth, which in turn led to a slump in crude oil demand, have been heating up. Since September, WTI crude oil futures have fallen by more than 10%, and Brent crude oil futures have fallen by nearly 12%. The crude oil term structure also shows that demand has begun to deteriorate rapidly recently. The 12-month spread of Brent crude oil fell from 4 US dollars to 1 US dollar in the past month.

Last Friday's disappointing US employment data sent a weak labor market signal, causing the market to worry that the risk of a US recession might exceed expectations. Also, in the US, with the resumption of economic activity after the pandemic, car mileage has returned to pre-pandemic levels, yet gasoline consumption has dropped significantly. Demand for gasoline is being impacted by improvements in automotive fuel economy, more hybrids, and EVs.

Meanwhile, in China, data shows that crude oil import data has turned negative year-on-year since this year, for the first time since excluding the epidemic and holiday factors. Some agencies expect gasoline demand to have peaked ahead of schedule due to the energy transition and the explosion in the electric vehicle sector. Russell Hardy, CEO of Vitro Group, the world's largest independent oil trader, said: “China's demand for gasoline may peak this year or next — not because no one is driving, but because mainstream models are slowly shifting to electric vehicles.”

Russell Hardy expects global oil demand growth to fall from 1.65 million b/d this year to around 1.1 million b/d next year, with most of the growth coming from developing countries.

Oversupply is a probable situation, and many investment banks lower oil price expectations

While demand is sluggish, U.S. crude oil production is close to the highest level in history, and production in other non-OPEC+ oil producers has also risen sharply. Furthermore, OPEC+ voluntary production reduction countries held an interim meeting to decide to extend full voluntary production cuts for two months until the end of November. This also means that its members will withdraw from the voluntary production reduction agreement month by month starting in December. It is expected that crude oil supply will expand further at that time.

According to some opinions, although OPEC has continued to cut production by 3 million b/d in the past two years, OPEC's control over the crude oil market is not as strong as before. Thanks to technological advancements and efficiency improvements, shale oil and gas output has increased 30% over the past 3 years, almost offsetting OPEC's efforts to cut production. The US has surpassed Saudi Arabia and Russia to become the world's largest oil producer. Meanwhile, in order to attack Russia, the US acquiesced in Iran and Venezuela to increase crude oil production, further exacerbating oversupply.

“People are coming to the conclusion that the next 12 months won't be an easy environment for them unless there is a supply shock,” Russell Hardy said. He added that the market is currently not too worried about the supply of crude oil in 2025 and 2026.

Goldman Sachs recently stated in a report that market expectations of oversupply of crude oil have become a catalyst for weak oil prices, and it is expected that the entire crude oil market may shift from tight supply to oversupply by 2025. Last month, Goldman Sachs lowered its oil price forecast. It is estimated that the average price of Brent crude oil futures in 2025 is 77 US dollars/barrel, lower than the previous forecast of 82 US dollars/barrel. The bank pointed out that OPEC+'s decision to rescind voluntary production cuts may mean that the organization's goal is to “strategically restrain supply from non-OPEC countries,” while warning that under various circumstances, crude oil prices may fall below its revised forecast.

On Monday, Morgan Stanley lowered its Brent crude oil price forecast for the second time in a few weeks as demand challenges intensified and supply remained sufficient. According to a report by Daimo analysts such as Martijn Rats, the average price of Brent crude oil will reach 75 US dollars/barrel in the fourth quarter. In contrast, the bank released a forecast last month that oil prices will be $80 per barrel from October to December, while the earlier forecast was 85 US dollars/barrel. Furthermore, the bank's forecast for oil prices for most of next year has also been slightly lowered.

Citi, on the other hand, said that by 2025, due to oversupply in the market, oil prices may drop to around 60 US dollars per barrel. However, Citi also anticipates that OPEC+'s delayed production increase plan and geopolitical factors, including supply disruptions in Libya, may support the price of 70 to 72 US dollars/barrel of Brent crude oil.

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