Comments Provided By: Ole Hansen, Head of Commodities Strategy, Saxo Bank
Crude oil prices have taken another hit, with market concerns shifting from demand recovery to the potential for increased supply. Despite an early rally in other commodities, spurred by China’s recent stimulus measures, crude has lagged behind. Brent crude, the global oil benchmark, failed to hold its ground above USD 75 per barrel and has since slumped over the past two days. The market now faces short-term pressure, with prices hovering near USD 70 and the potential for further declines toward USD 65 if a sustained breakout doesn’t occur.
Demand Stabilizing, But Supply Fears Loom Large
While the demand outlook for oil has begun to stabilize, it’s the fear of rising supply that is now driving prices lower. One of the key concerns is Saudi Arabia’s potential increase in production as it looks to regain lost market share. Reports suggest that Saudi Arabia may abandon its previous target of USD 100 per barrel, opting to raise output after two years of supporting higher prices through production cuts.
Libya is another player adding to the downward pressure. The country, rich in oil resources, has seen its production fall dramatically due to internal conflicts, but a recent political compromise could lead to a resumption of oil output. With both Saudi Arabia and Libya potentially adding to global supply at a time of tepid demand, the market remains vulnerable to further price slumps.
Brent Crude’s Volatile Journey
Earlier this year, Brent crude was trading in a wide range between USD 70 and USD 90 per barrel. However, recession fears and concerns about weakening demand—especially in China—briefly sent prices into the USD 60s. The Federal Reserve’s major 50-basis-point rate cut helped stabilize the market for a time, but the momentum has since faded. China’s stimulus measures also provided a temporary boost, but crude’s failure to stay above USD 75 has confirmed the weak market sentiment.
This decline comes at a time when hedge funds and speculators have significantly reduced their long positions in Brent crude. In fact, for the first time ever, hedge funds have held a short position in Brent, reflecting a growing lack of confidence in higher prices.
OPEC+ and the Struggle to Maintain Stability
OPEC+, led by Saudi Arabia, has been instrumental in cutting output to prop up prices since 2020. However, with slowing demand growth, especially in China, Saudi Arabia may now be forced to pivot away from its previous strategy. Since 2023, China’s oil demand growth has plummeted from 1.3 million barrels a day to less than 200,000 barrels a day in 2024. This slump, combined with increased production capacity within OPEC, has put further pressure on prices.
Saudi Arabia, which has borne the brunt of the cuts with around 1 million barrels of reduced output, is now rethinking its strategy. Saudi Aramco, the state oil company, has seen a decline in revenues, even as it continues to pay massive dividends crucial to the government’s budget. This economic reality, coupled with the fact that demand is weakening, has likely prompted Saudi Arabia to reconsider its price target and raise production levels in an attempt to regain market share.
The Road Ahead: Short-Term Pressure with Long-Term Uncertainty
As crude oil prices continue to struggle, the market outlook remains clouded by uncertainty. While the demand side appears to be stabilizing, the looming supply increases from Saudi Arabia and Libya have created new challenges for the market. For Brent crude, a move above USD 75 is necessary to reignite investor interest and trigger fresh buying, but until that happens, the risk of prices slipping further remains high.
With OPEC+ likely to delay its planned rollback of production cuts until December, the coming months will be critical in determining whether crude oil prices can find a sustainable footing or if they will continue to drift lower. The risk of a supply-driven slump into the USD 60 range is real, particularly if OPEC’s unity is tested by non-compliance from key members like Iran, Russia, and Kazakhstan.
In the short term, crude oil markets remain under pressure, with both supply and demand forces in flux, and market participants are bracing for what could be a volatile end to the year.
