Oil prices are poised for a fourth consecutive weekly loss, thrusting OPEC+ leaders into a challenging position as they gear up to review production targets later this month. West Texas Intermediate managed a modest 2.8% rebound on Friday, following speculation from Goldman Sachs Group Inc. analysts predicting OPEC intervention to bolster prices. However, the U.S. benchmark remains on a trajectory for a weekly dip of approximately 3%, marking a 20% decline from the peak in September.
The oversupply conundrum has been a significant driver of the downward spiral, with real-world barrel prices steadily softening over recent weeks. Anticipated increases in shipments from Guyana and the North Sea in the coming month, coupled with a surge in U.S. exports, have contributed to the surplus. Algorithm-driven traders exacerbated the slump by intensifying sell-offs after Brent slipped under the $80 threshold on Thursday.
The escalating volumes of oil in circulation cast uncertainty over the upcoming meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its allies at the end of next week. Despite the commitment of Saudi Arabia and Russia, the group’s primary producers, to maintaining additional output curbs until year-end, Russia has witnessed a surge in crude exports in recent weeks.
Technical factors have further fueled the market’s vulnerability. Key market indicators are currently trading in a bearish contango structure for the first time in months, while the breach of the 200-day moving average in recent days has intensified selling pressure.
As of the time of writing this article, the WTI crude oil contract for December exhibited notable activity, trading at $75.89, reflecting an increase of nearly 4%. While this rise could be perceived as a correction, the possibility of a continued upward trend beyond $79.50 may indicate a potential trend reversal. Concurrently, the persistence of the current bearish trend, especially if it breaches the $73 mark downwards, has the potential to accelerate the bearish momentum, possibly retracting until it reaches the $40 mark, particularly if the critical support level at $67 is breached.
Rebecca Babin, a senior energy trader at CIBC Private Wealth, remarked, “Crude bulls were taken to the proverbial woodshed this week as the commodity experienced a frictionless selloff that occurs when bulls lose conviction and macro-driven traders catch a whiff of deflation.” She anticipates volatile markets and low trading volumes as consensus shifts toward Saudi Arabia and Russia extending voluntary cuts through at least the first quarter.
Adding to the market woes, U.S. inventory data earlier in the week revealed a sharp increase in stockpiles, particularly at the crucial storage hub of Cushing, Oklahoma. These buildups coincide with seasonal maintenance at refineries, reducing their demand for crude. Simultaneously, overseas shipments have surged alongside the rise in U.S. production.
The International Energy Agency’s announcement earlier in the week that production growth will undermine expectations of a tight global market this quarter further contributes to the prevailing price weakness. Despite the risks associated with the Israel-Hamas conflict, traders, who initially purchased bullish options, are now shelling out larger premiums for bearish options to hedge against potential further declines.
However, some analysts express optimism that the current price weakness is temporary, with OPEC poised to defend prices. Goldman Sachs analysts, including Daan Struyven, assert, “We believe that OPEC will ensure that Brent oil prices end up in a $80-to-$100 range in 2024 by ensuring a moderate deficit and leveraging its pricing power.” They attribute the recent selloff to non-OPEC supply surpassing expectations.
The demand outlook remains uncertain, with China, the world’s largest crude importer, reporting reduced daily processing rates in October as apparent oil demand fell month-over-month. Meanwhile, in the United States, unemployment benefits have reached the highest level in almost two years, signaling a potential slowdown in the world’s largest crude consumer. As oil markets navigate these challenges, all eyes turn to OPEC+ and their crucial decisions in the weeks ahead.
As the market grapples with ongoing uncertainties, the looming prospect of a fifth consecutive weekly loss in oil prices adds a layer of complexity, underscoring the challenges ahead for global energy dynamics.
Source: Bloomberg
