Oil Trading Dips Below $80 Amid Demand Concerns
Downward Spiral for Oil Trading: OPEC+ Challenges Amidst Weakness
The oil market faced intensified downward pressure as Brent settled over 2.5% lower. Besides, it slipped below the $80/bbl mark for the first time since July. The decline challenges the support of the 200-day moving average. That way, concerns in the market have arisen about the stability of OPEC+, prompting a reassessment of future market dynamics.
The weakening market poses a significant challenge for OPEC+, especially as it enters the first quarter of 2024, where a surplus is looming in the absence of an extension to Saudi cuts. The degree of weakness witnessed in recent days raises concerns, particularly since we are trading below Saudi Arabia’s fiscal breakeven level – a level that the country has been keen on keeping oil prices above. It’s increasingly likely that both Saudi Arabia and Russia will extend their additional voluntary cuts into early next year. However, the reliability of Russia’s commitment to announced cuts remains uncertain, given the recent uptick in seaborne trading crude oil exports.
Oil Price Forum and Demand Worries
Amid the downward trend, concerns over demand have emerged. Refinery margins weakening since the end of the northern hemisphere summer suggests a potential reduction in end-use demand, which could, in turn, lead to weaker crude oil demand from refiners. Additionally, worries persist over Chinese demand as winter approaches. Despite concerns about the Chinese economy throughout the year, refined oil demand numbers have performed strongly until now.
While current indicators suggest that the market is not as tight as initially expected, projections for tightness in 2024 – particularly in the second half – and the high likelihood of further intervention from OPEC+ (or some of its members), if needed, suggest that significant further downside in the market is limited. The forecast maintains Brent at an average of $90/bbl in 2024.
Gas Market in Transition: Zinc Supply Tightens
Shifting our focus to the gas market, EU storage is gradually decreasing. Although the decline is slow, assuming a normal winter, expectations are that storage will still finish the heating season above the 5-year average. Weak demand from the power sector, reflected in negative spark spreads, is anticipated to influence the EU gas balance throughout the winter months.
Among industrial metals, LME zinc leads the gains, with prices surpassing $2,600/t due to signs of tightening supply. Recent LME data shows that cancelled warrants for zinc have risen significantly, reaching the highest level since October 25. The cash/3m spread contango has narrowed, indicating potential further outflows.
Market Dynamics and Outlook
The descent of oil trading below $80/bbl reflects a complex interplay of geopolitical tensions, weakening demand, and challenges within OPEC+. The future trajectory of the market hinges on critical decisions from OPEC+ and the recovery of demand, with indicators pointing to both tightness and the potential for intervention.