Oil breaks out of narrow trading range as recession fears grow

The price of oil fell from its year-long trading range as investors grew nervous about the impact of a slowdown in the world’s largest economies on crude demand.

Brent crude, which has been trading between about $73 and $92 since last October, fell to $68.68 on Tuesday, its lowest level since December 2021.

That came as a report showed China’s oil imports were still below last year’s levels, adding to growing concerns about the strength of global demand.

Despite regaining some ground on Wednesday, the international benchmark is now down 13 percent from Aug. 26, when the price was pushed higher by concerns about tight supply.

The U.S. equivalent, WTI, fell to $65.27, its weakest since May 2023, although it rebounded 2.1 percent on Wednesday. Brent crude oil hit $70.61 a barrel as Hurricane Francine disrupted oil and gas production along the US Gulf Coast.

OPEC on Tuesday downgraded its forecast for oil demand growth in 2024 for the second consecutive month, just days after eight members of the expanded group of producers, known as OPEC+, said they would delay the plan to reverse the cuts voluntary production that was to start in October. with two months.

“Everyone is going bearish. . . (saying) China is bad, the US is going lower and suddenly you’re all consumed with soft talk and very bearish sentiment,” said Bjarne Schieldrop, chief commodity analyst at SEB.

He added that “between the lines” he expects Opec to “accept a lower (market) price, a little more volatility (and) a little more uncertainty in the market.”

Others are also cautious. Citi advised investors to sell all rallies and said the price will head towards $60 next year due to a “considerable surplus”.

Ben Luckock, head of oil at trading firm Trafigura, told a conference call ahead of Tuesday’s drop that Brent would fall “into the $60s” relatively soon, although he also warned against being too bearish.

Some fund managers also anticipated weakness. “We are underweight oil stocks,” Ninety One’s Paul Gooden said, adding that “we see downside risk.”

Falling prices pose a challenge for OPEC+. Despite delaying a planned output increase of 180,000 barrels a day next month and 540,000 barrels a day by the end of the year, strategists believe the group may struggle to support prices.

Delaying the reversal of voluntary cuts risks permanently ceding market share to other manufacturers, analysts say. OPEC said it expects most of this year’s supply increase to be driven by the US, Brazil and Canada.

Keeping a lid on the price of Brent, which averaged $82.90 this year through the end of August, was the prospect that OPEC could release more barrels to the market if prices rise too much.

Meanwhile, conflict in the Middle East, and briefly a political dispute that shut down much of Libya’s output, provided a floor to the market.

But the weak demand picture appears to have removed that support.

OPEC’s decision to delay restarting production failed to support prices, indicating that “the market is not impressed and (they) were looking more for a reversal,” said Nitesh Shah, head of commodities at ETF provider WisdomTree.

“The hard truth is that demand is too weak at the moment and therefore just deferring is not enough. They needed a bold signal that they would keep production curtailment for much longer than this two-month delay.”

The price drop comes at a sensitive time ahead of the US presidential election in November.

While the selloff could favor Vice President Kamala Harris by lowering gas prices for American drivers and helping to control inflation, the market’s weakness also signals growing concern that the U.S. economy could be headed for a sharp slowdown.

For much of the past five years, short-term supply shortages have meant that oil for delivery a year ahead has traded well below near-term prices, averaging nearly $5 a barrel. But this gap has closed.

That shift suggests stocks could rise, as they might in a recession, Morgan Stanley said, although its economists aren’t predicting a recession themselves. The bank downgraded its Brent forecast for the fourth quarter of 2024 to $75 a barrel from $80, while it expects $75 to remain throughout 2025.

The US Energy Information Administration forecast on Tuesday that crude would return to $80 a barrel this month and average $82 in the fourth quarter of the year as OPEC production cuts lead to a deficit, despite current concerns about weakening demand.

Meanwhile, countries eager to increase production, such as the United Arab Emirates, “are now starting to accept that 2025 is not the year to increase production, instead they are pushing it to 2026,” says Jorge Leon, oil strategist at Rystad Energy and previously at BP and OPEC.

“They know there is no room to increase production.”