Crude Oil Prices Fall, More Weakness Ahead: BCA By Investing.com

Investing.com — Markets are under increasing bearish pressure, with a price breakdown pointing to further weakness ahead.

Analysts at BCA Research, in a note dated Friday, point to the factors contributing to the recent collapse in oil prices and signal that the worst may not be over.

Investors are advised to reduce their exposure to oil as market fundamentals suggest that prices will continue to decline over the next six to nine months.

One of the main factors contributing to the decline in crude oil prices is the downward revision of global demand forecasts.

Major organizations including the International Energy Agency (IEA), the US Energy Information Administration (EIA) and OPEC have cut their oil consumption forecasts for 2024 and 2025.

This marks a change in sentiment from earlier, more optimistic projections. In addition, prominent Wall Street banks such as Goldman Sachs, Morgan Stanley and Citi cut their crude price targets.

This pessimism is supported by weaker-than-expected demand data. In the first half of 2024, global oil consumption growth hit its lowest level since 2020, largely driven by subdued economic activity and lower demand from key markets, particularly China.

China’s reduced crude imports in August, down 7 percent from a year earlier, added to fears about global demand.

While demand is weakening, supply dynamics have also played a role in lowering prices. Production from non-OPEC countries such as Brazil, Canada and the US increased, more than offsetting OPEC+ production cuts.

The 1.5 million barrels per day (b/d) increase from these non-OPEC countries overshadowed the 1.2 million bpd drop in OPEC+ output.

The result was a flattening of the oil futures curve, indicating waning enthusiasm for short-term contracts. The price spread between immediate and future deliveries narrowed, reflecting growing market concerns about oversupply in the face of falling demand.

While the outlook for crude oil prices remains shaky, there is the possibility of a near-term rebound.

Money managers shed their long oil positions, with net longs in both Brent and West Texas Intermediate (WTI) hitting record lows.

Historically, such low net long positions have been followed by price increases, increasing the likelihood of a short-term rally.

However, BCA Research points out that any potential rally is likely to be short-lived. “Even in cases where prices have risen, the 23-day average duration of the rally is relatively short,” the analysts said.

The absence of strong fundamental catalysts for sustained demand growth further supports the view that any price recovery would be temporary.

From a cyclical perspective, the path of least resistance for oil prices remains to the downside. Historically, oil prices tend to weaken during the fourth quarter, a period marked by lower demand after the summer season.

Refineries typically perform maintenance during this time, leading to a build-up in crude inventories, which puts additional downward pressure on prices.

In addition, the broader economic outlook is not favorable for crude oil.

“BCA Research strategists assign high odds to an economic downturn in the next 12 months. Thus, global crude oil demand conditions are likely to deteriorate further,” the analysts said.

The reduction in Saudi Aramco’s official selling price (OSP) to Asian buyers to a near three-year low is another negative signal for the demand outlook.

BCA recommends that investors reduce their exposure to crude oil, particularly over a six- to nine-month horizon.

The note highlights the cyclical vulnerability of oil markets and the high likelihood of continued price weakness.

While short-term rallies driven by technical factors are possible, they are expected to be fleeting and prices are likely to return to the downside once these rallies lose momentum.

BCA Research also points to the limited effectiveness of OPEC+ efforts to stabilize the market. Even if OPEC+ extends its production cuts, it may not be enough to prevent an oil glut in 2025.

The coalition would have to make even deeper cuts, which risks internal disagreements and compliance issues.