Oil Market Deficit Expected to Provide Temporary Support for Brent Prices in Q4

Investing.com — Analysts at Citi suggest that Brent crude oil prices may see support in the near term, as demand is anticipated to surpass supply in the fourth quarter of the year.

A recent decision by the Organization of the Petroleum Exporting Countries (OPEC) and its allies to postpone the tapering of voluntary output cuts, combined with ongoing supply disruptions in Libya, is expected to create an oil market deficit of approximately 0.4 million barrels per day during the last quarter of 2024. According to Citi’s analysts, this situation could temporarily sustain prices around the $70 to $75 per barrel range.

Additionally, the benchmark prices could be lifted by a potential recovery in demand from China, the world’s largest oil importer, as recent demand levels have been relatively subdued.

However, the analysts warned of a “renewed price weakness” anticipated in 2025, forecasting Brent prices could decline to $60 per barrel due to an expected surplus of one million barrels per day.

On Thursday, crude oil prices rose following a significant interest rate cut by the US Federal Reserve, which elicited a mixed response from traders amid ongoing concerns regarding global demand. By 03:30 ET, Brent crude was up 0.9%, trading at $74.34 per barrel, while West Texas Intermediate (WTI) futures increased by 1.0% to $70.58 per barrel. The benchmarks managed to recover after dipping in Asian trading, with Brent hovering around its lowest level of the year.

The Federal Reserve reduced interest rates by 50 basis points on Wednesday and hinted at additional cuts in the near future as part of an easing cycle aimed at stabilizing the economy following a protracted fight against rising inflation.

While lower rates generally support economic activity, the Fed’s aggressive rate cut raised concerns about a potential slowdown in broader economic growth. Fed Chair Jerome Powell sought to alleviate some worries but indicated that the central bank does not plan to return to an era of very low interest rates, suggesting that the neutral rate will likely be significantly higher than in previous years.

In the meantime, US government data released on Wednesday revealed a more substantial-than-expected draw of 1.63 million barrels in crude inventories. Analysts at Citi attributed this drop to reduced net imports and domestic production exceeding the decline in crude oil consumption by refineries.

The analysts noted that US crude production was impacted by Hurricane Francine, which resulted in a temporary shutdown of up to 732,000 barrels per day of offshore oil output in the Gulf of Mexico. The effects of this disruption are expected to be reflected in upcoming data.

Although this decline in inventories was much larger than the anticipated decrease of 0.2 million barrels, it was accompanied by increases in distillate and gasoline inventories, fueling concerns that US fuel demand may be slowing as the busy summer travel season comes to an end.