Oil market braces for volatility as supply glut fears drag Brent to 9-month low

Oil market watchers are expecting further price volatility in the coming weeks after crude futures slid dramatically to a nine-month low on bets that disruptions to Libyan supplies will be short-lived with exports returning to the market sooner than expected.

Crude futures extended losses Sept. 4 after slumping to their lowest levels since mid-December the previous day.

The NYMEX front-month crude settled at $69.20/b, down $1.14 on the day and down $8.22 since Aug. 26. ICE front-month Brent settled at $72.70/b, down $1.05.

Platts, part of S&P Global Commodity Insights, assessed physical Dated Brent at $75.83/b on Sept. 3, a 4.8% fall on the previous day's assessment and the lowest since Jan 8, 2024.

After a brief rebound earlier on Sept. 4 sparked by reports that OPEC+ may delay its plans to unwind some production cuts in October, crude futures continued to lose ground.

Crude prices had already retreated from a recent high of $82/b in mid-August, dragged down by a combination of weak Chinese crude import data, low refinery activity, and economic data signaling a slowdown in global oil demand growth. A spate of recent downward oil price forecast adjustments by leading investment banks has also weakened market sentiment.

Goldman Sachs on Aug. 27 trimmed its 2024 and 2025 Brent oil price forecasts by $5/b, citing upside "surprises" to OECD oil inventories, efficiency gains from US shale producers and expectations that falling natural gas prices will temper oil demand growth.

But the latest selloff has been driven largely by two supply-side stories.

Libya, which has experienced almost constant oil sector volatility since 2011, has been the biggest drag on prices in recent days, with rival political factions making progress on a deal Sept. 3 that could end a nationwide crude shutdown.

The closures slashed production by 63% in a week, according to the Libyan National Oil Corporation, equivalent to 724,000 b/d according to the Platts OPEC Survey from S&P Global Commodity Insights. Force majeure is in place on the 300,000 b/d Sharara and 70,000 b/d El-Feel fields. However, a UN-led negotiation over the central bank crisis made a breakthrough Sept. 3, with the House of Representatives in Benghazi and Tripoli-based High State Council agreeing to jointly appoint a new governor within 30 days and extend consultations until Sept. 9.

The recent price slump also poses a serious challenge to OPEC+, which was due to start unwinding 2.2 million b/d of voluntary cuts from October, beginning with 190,000 b/d.

The increase by eight members including OPEC+ leaders Saudi Arabia and Russia is dependent on market conditions, the alliance said in June, but there is thought to be little desire among the group to keep unused capacity offline, particularly following months of quota non-compliance by Iraq and Kazakhstan.

Non-OPEC crude production is growing this year, with Commodity Insights analysts expecting output to rise 1.55 million b/d between 3Q 2024 and 1Q 2025.

"Canada is leading global growth over this period," the analysts said in a report, pointing to an expected increase of 315,000 b/d by 1Q 2025. "Oil sands mines are ramping up out of 2Q 2024 maintenance, and at the same time, debottlenecking initiatives are beginning to add new volumes."

The analysts also pointed to expected production increases over the period from the US, Norway, Kazakhstan, Guyana and several other countries.

"New capacity in Guyana is not scheduled until 2H 2025, but output that flagged in 1H 2024 is now starting to pick back up, adding pressure in the Atlantic Basin," the analysts said.

Price recovery?

A number of market watchers believe the current price slump will make it increasingly difficult for OPEC+ producers to stick to their original plan.

Payam Hashempour, research associate director at Commodity Insights, said the Libya crisis shows how supply/demand fundamentals remain the key risk to OPEC+'s plans.

“Although the recent outages in Libya underscore potential surprises that could drive prices higher, overall, not much has changed; there is so much oil available that unless we see a sustained drop in supply, geopolitical fear price premiums should be short-lived,” Hashempour said.

It also remains unclear if a deal in Libya will materialize and hold, as political forces only agreed to appoint a new central bank governor in the next 30 days, UBS noted in a Sept. 4 note, adding that it expects Brent to recover above $80/b over the coming months.

"We still believe the oil market is undersupplied despite weak Chinese oil demand, as demand remains strong in other countries and supply growth has disappointed in some non-OPEC+ states," UBS's oil strategist Giovanni Staunovo said in a Sept. 4 note. "While prices are likely to stay volatile in the near term, we retain a positive outlook and expect prices to recover from current levels over the coming months."

Indeed, despite the recent crude selloff, price indicators are mixed with the crude forward structure showing prompt tightness while the forward curve for oil products paints a much weaker picture, according to Vitol's Asia head Michael Muller.

The forward curve for crude oil remains backwardated, with prompt prices higher than future-dated contracts, suggesting that markets are still concerned over near-term supplies and demand is robust, Muller told the Gulf Intelligence daily energy podcast on Sept. 1.

"There is still a very, very strong signal from the markets that demand at the very front end for crude oil is strong... [but] the markets are less strong in refined products and that is generally your leading indicator where the demand actually occurs," Muller said, noting a contango price structure in many oil product markets.

Still, the crude backwardation has narrowed recently. For instance, the NYMEX front-month crude premium to the 12th month settled at $3.46/b Sept. 3, down from $5.87/b on Aug. 26 and $8.28/b on July 18.

Demand weakness

Oil analysts at Commodity Insights still expect prices will stay generally soft through the autumn, averaging $80/b in December and lower in 2025.

They expect global liquids consumption to fall 1.46 million b/d between September 2024 and March 2025, on a "combination of falling gasoline consumption in the US, easing [Middle East region] power burn and lower seasonal jet fuel demand," they said in a recent report.

"Weak demand from China continues to weigh on the market. Crude imports in China are down 324,000 b/d year-to-date, putting it on track for what would be the first annual decline since 2000, excluding the pandemic period," the analysts said.

In Asia, the biggest concern for the refining industry is weak demand weighing on key oil product cracks amid tepid economic activity, according to middle distillate marketers and traders at major South Korea, Taiwanese and Japanese refiners.

Broader economic activity across East Asian economies remains muted, with gasoil and petrochemical demand continuing to lag amid lackluster performance in the manufacturing and construction sectors on top of dismal goods and services exports, according to market watchers.

Platts, part of S&P Global Commodity Insights, assessed the second-month Singapore gasoil crack swap against Dubai crude at an average of $16.77/b so far in Q3, up from $16.53/b in Q2 but sharply below the average $22.12/b in Q1 and the 2023 average of $22.82/b.

Chinese refineries' crude throughputs extended their downtrend in July, falling 2.0% from June to a 21-month low of 13.96 million b/d, reflecting cooling demand in Asia's biggest oil consumer after the country's gross domestic product growth slowed to 4.7% in the second quarter.

Elsewhere, Japan's real GDP growth forecast for 2024 was revised down in the July update to 0.1% from 0.5%, while Asia's fourth biggest economy South Korea saw its July industrial production undershoot expectations, falling 3.7% month on month.