Fundamentals point to more downside for oil by Investing.com

Investing.com — Global markets are currently facing several headwinds that could push oil prices lower. Despite brief rallies, the market struggled to maintain upward momentum. Analysts at Piper Sandler anticipate another downside.

Analysts examine key factors contributing to this bearish outlook, including weak demand, oversupply concerns and the broader macroeconomic environment.

One of the main drivers of the anticipated decline in oil prices is the persistent weakness in global demand.

Piper Sandler points to some worrying indicators, particularly from China, the world’s largest oil importer. Revised data on China’s petroleum product inventories and demand reveal a significant drop in consumption.

From March to July 2024, China’s demand for final products fell by 500,000 barrels per day (kb/d) year-on-year, with no signs of an immediate recovery. This drop in demand is reflected in other major economies, where industrial activity and transport demand remain subdued.

In addition to weak Chinese demand, global diesel demand also underperformed.

“The truth is that demand for middle distillate is not strong anywhere. Global diesel demand growth stands at – five over the past 3 mma at the end of June and looks unlikely to improve in July/August,” analysts said.

On the supply side, the situation is equally worrying. The futures market has shown a consistent contango structure, where future oil prices are higher than current prices, indicating expectations of oversupply.

Analysts at Piper Sandler point out that despite recent attempts to manage supply, OPEC and its allies are struggling to stabilize the market. The note points out that OPEC will need to implement further production cuts as the market enters Q4 2024 to prevent a significant drop in prices.

In addition, inventory levels, particularly in the United States, remained high. This surplus is exacerbated by weak global demand and robust production levels from key producers such as the US, Saudi Arabia and Russia.

High inventory levels are putting additional downward pressure on prices as the market struggles to absorb excess supply.

The broader macroeconomic environment also contributes to the bearish outlook for oil. Global economic growth is slowing, with key indicators such as manufacturing output and trade volumes pointing to a deceleration.

The note signals that rising interest rates in developed economies, particularly the US, could reduce consumer spending and industrial production, further reducing oil demand.

In addition, China’s economic policies have failed to stimulate the kind of growth needed to support higher oil prices. Analysts note that despite some policy adjustments, Beijing’s measures have not been enough to boost economic activity to levels that would have a significant impact on global oil demand.

Technical analysis of the oil market also supports the bearish case. Piper Sandler notes that critical support levels have been breached in recent trading sessions, with no clear indicators of an imminent reversal. The note notes that market sentiment remains close to “rock bottom”, with speculative positions in Brent futures showing a steep decline.