Oil futures slid nearly 2% to seven-week lows at the close of trading on Monday, as global demand concerns trumped rising geopolitical tension in the Middle East. The Brent front-month futures contract dropped 1.66% to $79.78 per barrel, breaching the $80 price-floor once more, while the West Texas Intermediate ended the session down 1.75% at $75.81 per barrel. This marked the fourth week of decline for oil prices, with traders focusing on lackluster global demand and uncertainty regarding economic signals from China amidst escalating tensions in the Middle East and political unrest in Venezuela.
Despite geopolitical issues, the Middle East’s crude oil output remains largely unaffected, and the situation in Venezuela remains uncertain. The market is waiting for clear signals on summer demand in the Northern Hemisphere, particularly in the U.S., as well as China’s economic performance. China’s fuel oil imports dropped 11% in the first half of 2024, sparking concerns among traders about the direction of the market, as China is the world’s largest importer of crude oil. While global demand concerns mount, oil supply remains strong, with the U.S. leading production that is not affiliated with OPEC.
On the other hand, the number of U.S. rigs, considered a leading indicator of future production, rose by three to 589 in the week ending July 26. This marked the second consecutive weekly increase in the number of rigs, reaching the highest level since November 2022. OPEC is planning to increase production cuts later this year, with forecasts suggesting a potential oil market surplus in Q4 2024 or Q1 2025. The International Energy Agency (IEA) predicts stronger global supply growth next year, led by non-OPEC output growth in the U.S., Canada, Guyana, and Brazil adding 1.5 million barrels per day to the global supply pool.
Brent remains in backwardation, indicating that the current price is higher than prices for later months, with the difference exceeding $3 per barrel on Monday. The Brent April and May 2025 contracts traded at discounts of over $3 to the September contract, reflecting a market that is concerned about demand. While demand is a significant factor in oil prices, supply dynamics play a crucial role as well. With uncertainty surrounding global demand and ample supply, oil futures continue to face downward pressure.
Overall, the oil market continues to grapple with a delicate balance between global demand concerns and strong oil supply. Geopolitical tensions in the Middle East and political unrest in Venezuela are adding to market uncertainties. With the U.S. leading non-OPEC production and potential increases in global supply next year, the outlook for oil prices remains uncertain. Traders are closely monitoring demand signals from China, the U.S., and the rest of the Northern Hemisphere, as well as OPEC’s production decisions. The coming weeks will likely see further volatility in oil prices as market participants react to the evolving supply-demand dynamics and geopolitical developments.
