Crude oil's slump and OPEC delaying production hikes
By Ole Hansen, Head of Commodity Strategy at Saxo
Crude oil is heading for its worst weekly loss in almost a year. OPEC, just like many other forecasters, has misjudged the outlook for demand growth in 2024. As recently as last month, the group was still forecasting a 2 million barrel/day increase, and it looks increasingly like the IEA is closer to being correct in forecasting growth of less than 1 million, primarily due to softening demand in China, which is likely to have seen a peak in demand amid weak growth and a rapid rollout of EVs and hybrids, lifting demand for power while lowering it for gasoline and diesel.
OPEC+ can influence supply but not demand, and weak demand is currently the main focus and the driver of the price weakness seen. Until that situation stabilises, OPEC will not be able to increase production, probably not until sometime next year. In the short term, one of the few things OPEC can do is to hammer home the need for Iraq, Kazakhstan, and Russia to fulfil their obliged compensation cuts to make up for prior overproduction.
For now, I believe USD 70 Brent is a line in the sand the group may want to defend, either through verbal intervention, pressure on the three countries mentioned, or ultimately another economically painful cut in production. Apart from watching economic data from China and the US for signs of improvement, we also need to see global refinery margins stabilise and start to rise, as the current weakness sends a strong signal that any talk of an undersupplied market is wrong.
This week, both WTI and Brent broke key support levels at USD 71.70 and USD 75, respectively, which are now acting as resistance. As long as we stay below these levels, speculators will be viewing the market as a sell-on-rallies, instead of the buy-on-dips mentality that prevailed up until recently.
