After the oil crash, where will prices settle?

Good morning and welcome back to Energy Source, coming to you from New York.

Thousands of fossil fuel executives and global leaders are gathering in Houston, Texas this morning as Gastech, the natural gas industry’s largest trade show, kicks off in the US energy capital.

Gastech, which travels to different cities each year, returns to the US, where gas production is at record levels, prices remain low and the country has become the largest exporter of liquefied natural gas.

A theme to watch at this year’s conference is how executives navigate regulatory uncertainty in the world’s largest gas producer. We’re seven weeks into the presidential election campaign, where Donald Trump has repeatedly attacked Kamala Harris for pivoting her position to ban fracking, and project approvals for new LNG terminals remain up in the air. The Biden administration froze permits for new terminals in January, but that was later overturned by a federal judge.

Meanwhile, Canada and Mexico are raising tens of billions of dollars in investment as they target the Asian market, while US project expansions have slowed.

In today’s newsletter, FT energy correspondent Lukanyo Mnyanda reveals last week’s oil price rout and the dilemma facing OPEC.

Thanks for reading,

Amanda

After last week’s crash, where will oil prices settle?

It’s been a curious time for people following the oil markets this year.

Despite months of geopolitical tensions in the Middle East and growing signs of slowing demand in China, oil prices barely budged from their relatively tight ranges. And then, in the space of a week, months of excitement ensued as the price fell to levels not seen in nearly three years.

When the break from recent ranges came, it was faster and sharper than many expected, prompting a series of forecast changes from analysts who had spent most of the year confident that prices would hold somewhere around 85 dollars per barrel.

Instead, it fell below $70 for the first time since December 2021, before recovering slightly as a storm halted production in the Gulf of Mexico. That didn’t last, and bearish hedge fund bets signal that the price is more likely to head towards $60/b than $80/b.

The price move was “both faster and more abrupt” than anticipated, wrote Martijn Rats and colleagues, chief commodities strategist at Morgan Stanley, as they slightly cut their fourth-quarter forecast for Brent crude by $5 to $75/b. Morgan Stanley’s forecast, which the bank expects to hold for next year, was supported by other analysts.

But this information is only useful to a certain extent in a market that is still bound to be characterized by volatility that can catch many traders on the wrong side of market-moving events, be it economic data or geopolitical developments.

Bjarne Schieldrop, chief commodity analyst at SEB, also believes an average of $75/b for next year would be a fair value for crude, but cautioned that historical trends indicated that the price typically moves with about $15 per side over average.

That means crude could drop to $60/b or consolidate to $90/b at any time, depending on headlines. Nitesh Shah, head of commodities at ETF provider WisdomTree, said what was more important was where price would ultimately settle between those broad ranges.

Weak economic data from China and the fact that interest rate markets are increasingly pricing in huge rate cuts by the US Federal Reserve would support the view that the direction of travel will be lower due to weaker demand.

But if the Fed manages to pull off a soft landing on the economy, or if there is a major production disruption, the oil bear could suffer something.

The OPEC dilemma

Amid this volatility, OPEC and the International Energy Agency released their monthly oil reports which, unsurprisingly, contained mixed messages about the outlook for consumption. The producers’ cartel downgraded its forecast for oil demand growth this year only slightly to 2 million barrels per day, more than double the IEA’s prediction.

As trading indicates that investors are more inclined to be bearish on the price, Fatih Birol, the head of the IEA, may feel vindicated after the organization received sustained criticism for its gloomy views.

For OPEC, the events of the past week appear to have done little to resolve the dilemma of what to do with its unused capacity. The decision by the expanded OPEC+ group to delay a plan to increase oil supply by at least two months failed to support prices in any significant way.

That has reinforced questions about whether it will ever be able to bring back those barrels in the face of subdued global growth and a structural weakening of China’s appetite for oil due to changing demographics and the adoption of cleaner energy sources. But in the longer term, it might still be a mistake to write off OPEC’s ability to “balance” the market.

Some analysts, including David Allen of Octane Investments, believe that demand from emerging markets will increase oil consumption in the coming years, while additional supply from US producers will eventually run out, handing the initiative back to OPEC. They also argue that the jury is still out on the ability of renewables to replace hydrocarbons.

Allen expects Brent to strengthen to $105/b over the next “few years”. But for now, policymakers and consumers will be happy with lower prices while they last. (Lukanyo Mnyanda)

Power points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global reporting team. It reaches us at [email protected] and follow us on X at @FTEnergy. Keep up to date with previous editions of the newsletter Here.