WTI oil falls to $70 as OPEC production rumors and weak Chinese demand weigh

• WTI Oil fell to the $70 level as rumors of OPEC preparing to ramp up production led traders to pressure selling.
• A slowdown in Chinese demand and weak manufacturing figures weigh further.
• Mixed U.S. inventory data, disruptions in Libya and possible Federal Reserve tapering are other factors.

West Texas Intermediate (WTI), the US crude benchmark, fell sharply to $70.50, down more than 4.0% on Tuesday, as rumors of OPEC+ production cuts and concerns about slowing demand The Chinese weigh the black gold.

Six sources inside the Organization of the Petroleum Exporting Countries (OPEC) and its allies recently told Reuters that the organization plans to increase output from October.

“Eight OPEC+ members are scheduled to increase production by 180,000 barrels per day (bpd) in October as part of a plan to begin to roll back the latest supply cuts of 2.2 million barrels per day while maintaining time other cuts until the end of 2025,” said. Reuters.

The production increases come as OPEC+ struggles to compete with US shale producers. By increasing the production of its members, it hopes to push down the price of oil until it reaches or falls below the cost of shale production, thereby eroding the profit margins of shale companies.

WTI oil weakens on slowing demand from China

WTI Oil is further pressured by a slowdown in demand from China, the world’s largest oil consumer. China’s economy is growing more slowly, and recent data showed Chinese manufacturing activity hit a six-month low in August, as measured by the official manufacturing PMI. Although a separate private survey – the Caixin Manufacturing PMI – showed an increase in activity, markets were spooked.

Chinese stocks have seen deep selling recently, with the Shanghai Composite Index losing 11.88% since May 2024, falling from 3181 to 2803 over the period.

According to analysts, China’s economy is undergoing a structural change that will make it less dependent on oil in the future, another headwind for WTI. These structural changes include “the fuel shift to electric vehicles (EVs) and from oil to liquefied natural gas (LNG),” Daan Struyven, head of research at Goldman Sachs, said in a recent interview.

Oil stocks and disruptions in Libya to support

Another factor in the decline in WTI oil may also be mixed inventory figures reflecting a fluctuation in US demand. Figures from the Energy Information Administration (EIA) for the week of August 23 showed that oil inventories did not fall as steeply as expected and contrasted with API data released a day earlier, which showed a deeper draw in inventories than expected. That said, oil demand has been up in the U.S. over the summer, with eight of the last nine inventory releases showing a drop in inventories, according to Bloomberg News.

Oil production in Libya was halted on Monday amid ongoing conflicts between the country’s various factions. Exports were halted at major Libyan ports, according to Reuters, as a showdown between rival political factions over control of the central bank and oil revenues disrupted supply.

Last week, one of the factions, the Libyan National Army (LNA) shut down the Sarir oil field in protest of the Libyan government’s dismissal of the governor of the Central Bank of Libya (CBL), Sadiq al-Kabir. Production at the El Feel oil field has also been halted since Monday.

However, the Libyan oil supply disruption provided little support for WTI prices.

“The current turmoil in Libya’s oil production could provide room for additional supply from OPEC+. But these fluctuations have become fairly normal in recent years, meaning any disruption is likely to be short-lived; with the flow of news indicating signals for restarting production,” said Bjarne Schieldrop, chief commodity analyst at SEB.

The impact of the Federal Reserve

WTI oil could be affected by Federal Reserve (Fed) decisions as they consider cutting US interest rates amid slowing inflation.

Markets are currently debating whether the Fed will have to cut interest rates by 50 basis points (bps) in September or just a standard 25 basis point cut. The latter is fully expected, while market-based probabilities for the former currently stand at around 30%, according to CME’s FedWatch tool. A further cut in interest rates would be bullish for WTI Oil as it would reduce the opportunity cost of holding the non-interest-paying asset.

Whether or not the Fed cuts more than 50 bps could depend on US labor market data released this week. In a keynote address in Jackson Hole, Fed Chairman Jerome Powell said downside risks to employment now outweigh upside risks to inflation.

If this week’s labor market data in the form of JOLTS Job Openings, ADP Employment Change, Sommer Claims, ISM Services Employment Index and Nonfarm Payrolls (NFP) on Friday come out weaker than expected, supporting the concerns of Powell, will likely prompt the Fed to cut by more than half a percent, causing the US dollar (USD) to fall and WTI oil to rally.