Global Market Facing Headwinds, Analysts Predict Lower Oil Prices
The current global market is experiencing challenges that could result in decreased oil prices. Despite some short-lived increases, the market is struggling to maintain upward momentum. Experts at Piper Sandler are forecasting further declines.
Key factors contributing to this bearish forecast include weak demand, oversupply worries, and the overall macroeconomic landscape.
A major driver of the expected drop in oil prices is the ongoing slump in global demand.
Piper Sandler highlights concerning signs, especially from China, the largest oil importer globally. Recent data on China’s oil product inventories and demand indicate a significant decline in consumption.
From March to July 2024, China’s final product demand fell by 500,000 barrels per day (kb/d) compared to the previous year, with no immediate signs of recovery. This decrease in demand is also seen in other major economies, where industrial activity and transportation demand remain subdued.
Alongside weak demand from China, global diesel demand is also lackluster.
“Middle distillate demand is weak worldwide. Global diesel demand growth is negative in the latest 3mma ending June and is unlikely to improve in July/August,” noted the analysts.
On the supply side, the situation is equally troubling. The futures market consistently shows a contango structure, indicating expectations of oversupply as future oil prices are higher than current prices.
Experts at Piper Sandler emphasize that despite efforts to manage supply, OPEC and its allies are struggling to stabilize the market. They suggest that OPEC will need to implement further production cuts in Q4 2024 to avoid a significant price drop.
Furthermore, inventory levels, particularly in the United States, remain high. This surplus, combined with weak global demand and strong production from key players like the U.S., Saudi Arabia, and Russia, exerts downward pressure on prices.
The broader macroeconomic environment also contributes to the negative outlook for oil. Global economic growth is slowing, with indicators like manufacturing output and trade volumes pointing to a slowdown.
The note mentions that rising interest rates in developed economies, especially in the U.S., are likely to dampen consumer spending and industrial output, further reducing oil demand.
Additionally, China’s economic policies have not generated enough growth to support higher oil prices. Despite some policy adjustments, Beijing’s measures have not been sufficient to boost economic activity to levels that would significantly impact global oil demand.
Technical analysis of the oil market also supports the bearish outlook. Piper Sandler highlights that critical support levels have been breached recently, with no clear signs of an impending reversal. The sentiment in the market remains low, with speculative positions in Brent futures showing a sharp decline.