Brent crude at its lowest level for 3 years despite OPEC's intervention.
Weekly analysis of the oil market
Last week saw a sharp decline in crude oil prices, with Brent crude closing at $71 per barrel on Friday, marking its lowest point since December 2021. The fall was attributed to the release of disappointing macroeconomic data from the United States and China, which reignited concerns about the demand for oil. The decision by OPEC+ to prolong its additional voluntary production cuts for another two months failed to stem the downward trend. This was due to the anticipated resolution of the conflict in Libya and a resurgence in oil exports. Furthermore, the decrease was exacerbated by fund managers in the futures markets who cut their net long positions in Brent and WTI by a total of 99,889 contracts to 139,242, as reported by ICE Futures Europe and the CFTC, reaching an all-time low.
On a weekly average, ICE Brent futures for October delivery declined by $6.1/b (a 7.7% decrease, marking the largest weekly drop since October 2023) to $73.5/b. In a similar trend, WTI prices dropped by $6.3/b (an 8.4% decrease) to $69.1/b. Following a Bloomberg survey of economists on September 6, Brent price projections for the third quarter were lowered to $84.0/b (a reduction of $0.5/b) and to $82.6/b (a reduction of $0.4/b) for the fourth quarter.
China: weak domestic demand; USA: slowdown in the labour market.
The recent release of China's PMI indices once again depicted a rather uninspiring outlook for the Chinese economy. The official composite PMI dipped slightly to 50.1, marking a 20-month low (July: 50.2). Meanwhile, the Caixin composite PMI, which has a greater emphasis on service companies, held steady at 51.2. Consequently, both composite PMIs suggest that the Chinese economy is persisting at a tepid growth rate. The downturn in the property sector continues to suppress domestic demand.
In the United States, the latest employment figures indicate a loss of momentum in the labor market, with a rise in the unemployment rate and a decrease in job creation. Some economists believe this report should encourage the US Federal Reserve to initiate rate cuts at its upcoming meeting on September 17 and 18 to avert further economic decline.
Globally, the JP Morgan PMI for August highlights a significant disparity between the manufacturing and services sectors. The services sector saw a marked acceleration, with its activity index climbing to 53.8, the highest since the previous May. Conversely, the manufacturing sector's decline persisted, marked by a decrease in production, new orders, and employment, with an index of 49.9. Ultimately, the composite index reached 52.8 in August, a slight increase from 52.5 in July, staying above the neutral 50.0 mark for the tenth month in a row.
OPEC+ aims to stabilize crude oil prices by prolonging additional voluntary production cuts.
Amid falling crude oil prices, sluggish oil demand growth, and the potential for a swift end to the Libyan conflict, the eight countries that had committed to voluntarily reducing their production last week have decided to delay their plans. Initially, the unilateral production cuts were to be phased out gradually on a monthly basis by 180 to 200 kb/d, from Q4 2024 to Q3 2025.
However, given the current market surplus and weak demand, these plans to augment supply have been deferred by two months. Members now intend to gradually reintroduce these cuts from December 2024 until November 2025, subject to further market developments. The recent agreement also includes a firm commitment from Iraq and Kazakhstan to implement specific measures to adhere to the agreed production levels and to honor their compensation schedules for August and September. Ultimately, OPEC+'s decision to moderate the pace of supply increases is expected to stabilize prices rather than cause an immediate surge in Brent crude to $80/b in the near term.
Upstream oil and gas investment in 2024: up 1% to $620 billion.
Rystad Energy forecasts a 1% increase in global upstream oil investment for 2024, reaching $620 billion. Shale oil investment is predicted to decline by 10% this year, while offshore investment is poised for a 6% growth. Africa is expected to see the most significant increase in upstream oil investments, at 20%, driven by projects in Nigeria, Uganda, and Libya. Europe follows with an 18% rise, primarily in Norway and the UK. In scenarios of steady oil demand, upstream investment is projected to stabilize at $620 to $660 billion annually for the years 2025-2030. This investment level should suffice for resource renewal if crude prices stay within the $70 to $80 per barrel range. Should prices fall below $60 per barrel, Rystad estimates that 25% of resource additions would become unprofitable.
USA: Fall in crude oil inventories and lower demand for petroleum products.
Last week, commercial crude oil inventories decreased by nearly 7 million barrels, placing stocks 4.5% below the five-year average. This reduction was attributed to decreased imports and a steady domestic crude oil production rate of 13.3 million barrels per day.
Regarding petroleum products, the delivery volume of refined products, seen as an implicit demand indicator, declined from the previous week by nearly 5%, primarily due to a 4% fall in gasoline demand. Concurrently, gasoline inventories increased by 0.8 million barrels.
Europe: Sharp fall in petrol prices.
In Europe, the Amsterdam-Rotterdam-Antwerp (ARA) hub reported a 2.5% decrease in petroleum product inventories, primarily due to reduced stocks of petrol (-3%), fuel oil (-8%), and kerosene (-7%). The prices of petroleum products mirrored and intensified the drop in crude oil prices, with petrol prices falling by 11% and diesel by 4%. Product cracks have continued to weaken due to low demand in Europe. Gasoline cracks have plummeted by over 40%, dropping below $6 per barrel, while diesel cracks have marginally increased by 4.5% to $17.1/bbl. Against this backdrop, the weekly average refining margin for Brent crude remained nearly unchanged (+1%) at $4.3/bbl, which is 16% lower than the five-year average of $5.1/bbl. Year-to-date, the average Brent FCC margin is at $9/bbl, in contrast to the $6.1/bbl five-year average.
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