What can OPEC+ do to prevent another oil loss?

OPEC+ may have no option left to counter the extreme killing of oil markets by further tightening supply. The bullish sentiment is likely to resurface if there is good news on the demand front.

For now, good news on oil demand seems a distant prospect, especially after the end of the summer peak. Concerns about China’s economy and the country’s oil demand are adding to worries about slowing economic growth in developed economies to depress markets. Those concerns prompted analysts and investment banks to cut their year-end oil price forecasts.

OPEC is starting to cut demand growth forecasts

Following the recent slide in oil towards the low $70s per barrel, the OPEC+ alliance delayed the start of the 2.2 million barrels per day (bpd) cut by two months to December 2024.

Decision did little to raise the price of oil— The market half-expected a delay, especially after OPEC cut its outlook for global oil demand growth in August, citing weakness in China.

Related: Oil Prices Rise on Jumbo Fed Rate Cut

In its monthly report for September, OPEC further cut its outlook for demand growth and further weighed on oil prices and market sentiment.

In just two months, worries about demand have turned the bullish view of traders and speculators to the most bearish position in oil futures in recorded history since 2011.

Money managers appear to have concluded that OPEC+ cannot or will not announce further production cuts to support prices, writes energy analyst John Kemp in BLOGS.

Biggest Bear Position Ever

Signs of weak demand and shrinking refining margins have weighed on oil prices and market sentiment, prompting speculators and money managers to reduce their bullish bet on oil futures to the lowest level recorded since 2011.

During the week ending September 10, money managers had a net short position in Brent for the first time in recorded history, since 2011.

Net long – the difference between bullish and bearish bets – fell to a net short in the reporting week to September 10 as speculators and traders remained concerned about weaker-than-expected growth in global oil demand. Weak Chinese economic indicators and falling refining margins exacerbated bearish sentiment on oil in the first two weeks of September.

In addition, persistent weakness in the refined fuel market contributed to an increase in the net short position in European and US diesel futures.

“Combining the five major crude oil and fuel contracts, their net duration fell to the lowest level since 2011, when the ICE Exchange began collecting data on Brent and gas oil.” Ole Hansen, Head of Commodity Strategy at Saxo Bank, he wrote this week, commenting on the latest Trader Engagement (TOC) report.

Ready for the rally?

Of course, the exceptionally bearish positioning in oil sets the stage for a rally where traders will look to cover their shorts. However, the market will need a change of narrative in demand for a comeback.

At the moment, there are no signs that demand is accelerating, while supply continues to be steady. If the three OPEC+ overproducers, Iraq, Russia and Kazakhstan, stick to their compensation schedule, some supply would exit the market in the coming months.

But will this be enough to prevent an oversupply next year?

Many banks say no.

Weaker-than-expected demand will tilt the oil market in a surplus over the next five quarters, Macquarie said last week, as it cut its forecasts for Brent and WTI crude for the rest of the year.

“As we enter the shoulder and return season, the ‘last bad’ for oil in the form of tightness in Q3 is fading fast as our balances factor in strong oversupply over the next five quarters,” Macquarie analysts wrote in a note.

Just two weeks after cutting its Brent forecast to $80 a barrel for the fourth quarter, Morgan Stanley cut its forecast again, now expecting the international benchmark. at an average of $75 a barrel in the last quarter of the year. Analysts at Morgan Stanley see headwinds from the demand side, which was their key reason for cutting their Q4 oil price forecast.

Falling oil demand from China, high inventories and rising US shale production have prompted Goldman Sachs to cut its Brent price range by $5 to $70-$85 on the barrel.

Citi is expecting oil at 60 dollars per barrel in 2025 if OPEC+ does not implement further cuts in its production.

So far, the group has signaled no intention to deepen production cuts.

Analysts expect OPEC+ to start reversing some of the current cuts early next year. Combined with rising non-OPEC+ supply, this will tip the market into oversupply for most of 2025, according to banks and analysts.

A rebound in demand would be welcomed by oil bulls, but as it is, there have been no signs in recent weeks of positive demand numbers. refinement margins are shrinking and leading to reduced refinery run rates in Asia and Europe.

By Tsveana Paraskova for Oilprice.com

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