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Analysts have pointed out that, while geopolitical risks have occasionally driven up oil prices over the past year, the impact of the Russia-Ukraine war and conflicts in the Middle East on the oil market has been limited. There is no oil shortage globally, and the supply to the oil market remains relatively stable. The recent sharp decline in oil prices is mainly due to insufficient demand, especially from China, the world’s largest crude oil importer.
Signs of weakening demand, combined with a decline in refining margins, have put enormous pressure on oil prices and market sentiment, prompting speculators and fund managers to swiftly sell off oil futures contracts, driving net long positions to their lowest levels since 2011.
This week, following OPEC’s second consecutive monthly downgrade of global oil demand forecasts, oil prices plummeted another 4% on Tuesday. Brent crude prices fell below $70 per barrel, and the U.S. benchmark WTI crude dropped below $66, both hitting their lowest levels since December 2021. Some institutions consider $70 a critical point for Brent crude futures.
According to OPEC’s monthly oil report, global oil demand is expected to grow by 2.03 million barrels per day (bpd) this year and by 1.74 million bpd in 2025, both below the previous forecasts of 2.11 million bpd and 1.78 million bpd, respectively. Total demand is expected to reach 104.2 million bpd in 2024 and 106 million bpd in 2025. OPEC’s demand forecast is much higher than that of other forecasting agencies.
Although these adjustments seem minor, the consecutive downward revisions indicate that OPEC may have overestimated demand growth, particularly from China. China’s oil demand is now expected to grow by 653,000 bpd in 2024, down from the previous forecast of 700,000 bpd. OPEC noted that continued sluggishness in the real estate sector and the increasing adoption of LNG trucks and electric vehicles could negatively impact diesel and gasoline demand.
Since July this year, international oil prices have been steadily declining and accelerated their fall in September. Industry analysis suggests that the current international crude oil prices are fluctuating at bottom levels with intense tug-of-war between bullish and bearish forces. In recent months, concerns about the outlook for oil demand have offset any upticks from geopolitical tensions and supply disruptions, such as production shutdowns due to hurricanes in the U.S. Gulf of Mexico or political strife in Libya.
At the same time, refining margins have continued to slip. Last week, refining margins across Asia fell to their lowest levels for the same period since 2020, which could lead to reduced run rates at refineries in Asia, including China’s. According to data from LSEG cited by Reuters, Singapore’s refining margins in the first week of September plummeted by 68% compared to the first week of August.
Additionally, major global oil traders Trafigura and Gunvor hold pessimistic views on oil prices and demand.
Ben Luckock, Global Head of Oil at Trafigura, cautioned traders against betting entirely on shorts, though he still expects Brent prices to drop into the $60 range. Gunvor’s co-founder and chairman, Torbjorn Tornqvist, stated that Brent’s fair price is now $70 a barrel given the oversupply conditions.
