Crude Oil Prices Decline, Anticipating Further Weakness: BCA

Markets are experiencing increasing downward pressure, signaling potential further weakness ahead. Analysts at BCA Research have highlighted the factors contributing to the recent decline in oil prices, indicating that the situation may worsen.

Investors are encouraged to limit their exposure to oil, as market fundamentals suggest that prices could continue to fall over the next six to nine months. A major factor behind the drop in crude oil prices is the downward revision of global demand forecasts.

Prominent organizations, including the International Energy Agency, the U.S. Energy Information Administration, and OPEC, have all decreased their projections for oil consumption in 2024 and 2025. This represents a significant shift from earlier, more optimistic outlooks. Additionally, major Wall Street banks such as Goldman Sachs, Morgan Stanley, and Citi have reduced their crude price targets further fueling this pessimism.

This negative sentiment is reinforced by weaker-than-expected demand data. In the first half of 2024, global oil consumption growth reached its lowest level since 2020, primarily due to reduced economic activity and weakening demand from key markets, particularly China. China’s crude oil imports fell by 7% in August compared to the previous year, raising concerns about global demand.

On the supply side, increased production from non-OPEC countries such as Brazil, Canada, and the U.S. has contributed to falling prices, more than offsetting the production cuts made by OPEC+. The production increase from these countries has surpassed the output declines from OPEC+, resulting in a flattening of the oil futures curve. This flattening suggests diminishing enthusiasm for near-term contracts, as the price difference between immediate and future deliveries has narrowed, reflecting growing concerns about oversupply in light of declining demand.

Though the outlook for crude oil prices remains bearish, there exists a chance for a brief near-term rebound. Money managers have significantly reduced their long positions in oil, with net longs in both Brent and West Texas Intermediate reaching record lows. Historically, such low net long positions have often been followed by price rallies, indicating a potential for a temporary bounce.

However, BCA Research warns that any potential rally is likely to be short-lived. Their analysis indicates that even when prices have risen in the past, the average duration of such rallies tends to be relatively brief. Furthermore, the absence of strong fundamental catalysts for sustained demand growth suggests that any recovery in prices will likely be fleeting.

From a cyclical standpoint, the path of least resistance for oil prices continues to trend downward. Typically, oil prices weaken during the fourth quarter, a time characterized by lower demand following the summer driving season. Additionally, refineries usually engage in maintenance during this period, contributing to a build-up in crude inventories and further placing downward pressure on prices.

The broader economic outlook also appears unfavorable for crude. Analysts at BCA Research assign high probabilities to an economic downturn within the next year, suggesting that global demand for crude oil is likely to weaken further. Saudi Aramco’s recent reduction of its official selling price for Asian buyers to its lowest level in nearly three years serves as another negative indicator for the demand landscape.

BCA Research recommends that investors reduce their exposure to crude oil, particularly over the next six to nine months. Their analysis highlights the cyclical vulnerabilities within the oil market and the likelihood of continued price declines. While short-term rallies triggered by technical factors are conceivable, they are expected to be temporary, with prices likely returning to a downward trend as these rallies lose steam.

Additionally, BCA Research notes that the effectiveness of OPEC+ efforts to stabilize the market may be limited. Even if OPEC+ were to prolong its production cuts, it might not suffice to avoid an oil surplus in 2025 without deeper cuts, which could evoke internal disagreements and compliance issues among member countries.