Oil prices under pressure despite supply shock from Libya

Crude oil prices steadied earlier today after gaining more than 1% on Thursday on news of production cuts in Libya.

However, analysts believe benchmarks are still set for a monthly decline as pessimism about demand continues to weigh. In two recent oil price forecast updates, Goldman Sachs and Morgan Stanley cut their expectations for Brent and WTI crude, citing disappointing demand from China.

Earlier this week, Goldman cut its price estimate by $5 to between $70 and $85 a barrel for Brent crude, citing rising US shale production and high global inventories in addition to Chinese demand. This despite a substantial drop in global oil stocks in the first half of the year. Morgan Stanley also revised its oil price forecast earlier this month, citing the same factors as Goldman.

None of the banks, however, could have foreseen the unfolding events in Libya, which could literally decimate its oil production, which in July stood at nearly 1.2 million barrels per day. As of yesterday, it had fallen to less than 600,000 barrels per day, Reuters reported earlier.

In addition, Iraq’s production could also fall from September as the country tries to make up for overproduction under the OPEC+ production cut deal.

Even with these upbeat developments, oil is likely to see a monthly decline as the demand outlook remains the dominant factor driving trading decisions. And that’s despite the fact that oil imports into Asia this month will be higher than they were in July, signaling a rebound in demand. This in turn means that OPEC is unlikely to phase out any cuts anytime soon.

“The market is concerned about the medium-term outlook, with oil balances for 2025 looking weak,” ANZ analysts said in a note this week, quoted by Reuters. “We believe OPEC will have no choice but to delay the phasing out of voluntary production cuts if it wants higher prices.”

By Charles Kennedy for Oilprice.com

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