WTI oil falls to $74.00 as demand developments in China weigh

• WTI drops to $74.00 as lower demand from China, the world’s biggest oil consumer, weighs.
• The weakness comes despite a Libyan political faction shutting down all of the country’s oil production.
• OPEC+ is expected to increase production, which could reduce the WTI breakeven rate.

West Texas Intermediate (WTI), the benchmark U.S. crude, is trading down nearly a percent and a half to just above $74.00 on Wednesday. WTI is lower as worries about Chinese demand and risks of a broader economic slowdown offset supply losses from Libya and broader geopolitical risks in the region.

A slowdown in the Chinese economy, the world’s largest crude oil importer, is reducing demand, while structural changes and the replacement of gasoline cars with electric vehicles, as well as a general shift to greater reliance on green energy. still taking its toll.

“The big surprise this year on the demand side has been the softness of demand growth in China. The slowdown in Chinese demand, which is largely structural, is an important factor in oil markets over the next few years. One part is a macro story – GDP is growing at a slower pace – the other reasons are more oil-specific and micro and include the fuel switch to electric vehicles and from oil to LNG,” says Daan Struyven, Head of Research at Goldman. Sachs.

The price of WTI fell on Wednesday, despite news from Libya that the Sarir Oil field has almost completely stopped production, according to Reuters. The move was orchestrated by the Libyan National Army (LNA), which is protesting the Libyan government’s dismissal of the governor of the Central Bank of Libya (CBL), Sadiq al-Kabir. The LNA controls the east and south of the country, where most of the oil fields are located. The LNA said on Monday that all production and exports would be halted.

Speculation that OPEC+ will begin increasing production to drive down the price of oil so as to make it less profitable for competitors in the form of US shale producers is further weighing on WTI.

“OPEC has been quite effective in balancing the market and keeping oil prices in a range,” Struyven said in an interview with Bloomberg News, but “that will change if OPEC+ increases production.”

The result of such changes in OPEC+ strategy will be that oil prices could fall to a lower break-even rate, where the new floor for prices becomes the break-even rate for shale producers. However, the decline is likely to be gradual given the offsetting upbeat factors, says the Goldman Sachs researcher.

US monetary policy could be another factor for oil prices. If the US Federal Reserve (Fed) decides to continue cutting interest rates in 20204-2025, as now looks highly likely, WTI could gain a tailwind as it would lower the opportunity cost of holding oil versus interest. payment of assets.

US crude oil inventories fell last week, according to data from the American Petroleum Institute (API). U.S. crude oil inventories for the week ended Aug. 23 fell by 3.4 million barrels. This compared with a rise in inventories of 0.347 million barrels in the previous week. The market consensus estimate was for inventories to fall by 3.0 million barrels.

On Wednesday, the Energy Information Administration (EIA) will release its figures on US crude oil inventories. They are expected to show a similar decline, consistent with the downward trend seen during the summer. Of the last nine US inventory releases, eight have posted declines. This reflects rising demand, which is a favorable bottom line factor for oil.