Light crude oil futures fell significantly on Thursday, although prices rose from an intraday low of $67.16. The drop in oil prices began earlier this week after touching the 50-day moving average at $72.11, prompting selling pressure. Over the next two sessions, prices fell into short-term correction zone between $68.22 and $67.23. The market’s reaction to this level suggests that traders may try to form a new higher low at $67.16, in contrast to the September 10 low of $64.04.
Saudi production plans weigh on crude oil prices
Crude oil prices fell further after news emerged that Saudi Arabia, the world’s largest crude oil exporter, could increase production, abandoning its unofficial target of $100 a barrel. Reports indicate that the kingdom is preparing to increase production, citing internal sources from the Financial Times. OPEC+, led by Saudi Arabia and Russia, has worked to cut production to stabilize prices, but the effectiveness of this strategy is questionable.
Despite these production cuts, oil prices have fallen about 6 percent since the start of the year, weighed down by higher supply from other major producers, especially the United States, and weak demand growth in China.
Analysts point to potential additional supplies from Libya as another contributing factor to market weakness. Libya’s crude oil exports fell sharply to 400,000 barrels per day in September, down from more than one million barrels per day in August due to internal conflicts. However, the recent agreement among Libyan factions to appoint a new central bank governor could lead to increased oil revenues and exports.
Oil prices fall due to sharp correction and slowing Chinese demand
Crude oil prices fell for the second consecutive day, and losses accelerated on Thursday in what appeared to be a sharp correction. Almost all of the gains made by the introduction of China’s stimulus plan and accumulated tensions in Lebanon have been offset by a ceasefire put forward by the United States and France at an emergency meeting at the United Nations. The Financial Times reported that one additional factor that pushed crude oil prices further lower on Thursday was rumors that Saudi Arabia is willing to abandon its price target of $100 per barrel in light of the upcoming production normalization.
The US dollar index (DXY), which tracks the dollar against six other currencies, is trading steady, ahead of an expected highly volatile trading day. On the economic data front, the third reading of US GDP for the second quarter and the August durable goods orders data are due to be released. Add to that the eight Fed members who will take the floor, volatility is sure to see US dollar indices later in the day.
China, the world’s largest importer of crude oil, continues to see weak growth in demand, contributing to excess global supply. However, China’s new stimulus package somewhat limited losses in the oil market. On Thursday, Chinese officials pledged more fiscal spending to meet this year’s growth target of 5%, raising expectations for more economic measures that could boost oil demand.
On the supply side, the Energy Information Administration reported a larger-than-expected decline in U.S. crude oil inventories. Crude inventories fell by 4.5 million barrels to 413 million barrels last week, the lowest level since April 2022. Analysts had expected a smaller decline of 1.4 million barrels.
Bearish oil prices expected amid increased production and weak demand
Brent crude futures fell $1.27, or 1.7%, to $72.19 a barrel, while U.S. West Texas Intermediate crude fell $1.18, or 1.7%, to $68.51 a barrel. Both contracts fell more than $2 a barrel earlier on Thursday.
The Financial Times reported on Thursday, citing people familiar with the matter, that Saudi Arabia is preparing to abandon its unofficial price target of $100 per barrel for crude as it prepares to increase production.
The Organization of the Petroleum Exporting Countries – led by Riyadh’s de facto – along with the group’s allies including Russia, collectively known as OPEC+, has cut oil production to support prices.
However, prices have fallen about 6% so far this year, amid increased supply from other producers, especially the United States, as well as weak demand growth in China. Saxo Bank analyst Ole Hansen said: “The prospect of increased supplies from Libya and Saudi Arabia has been the main driver behind the recent weakness.”
A U.N. statement on Wednesday said delegates from Libya’s divided east and west had agreed on the process of appointing a central bank governor, a move that could help resolve the crisis over control over the country’s oil revenues that has stalled exports.
Libya’s crude exports averaged about 400,000 bpd in September, down from more than one million bpd in August, shipping data shows.
Given the combination of increased supply prospects from Saudi Arabia and Libya, coupled with weak demand growth in China, the outlook for oil prices remains bearish in the short term. Despite the contraction in U.S. crude inventories, the prospect of increased global supply and continued economic challenges in key markets such as China weigh heavily on prices. Traders should expect downward pressure on crude oil futures to continue unless significant shifts in supply or demand occur.
