Crude oil prices continue to be weak. Key factors to watch out for

Despite the OPEC+ group’s recent decision to extend their production cuts, weakness in global oil markets continued due to falling Chinese demand and rising American supplies. Rising geopolitical tensions also added pressure on the commodity demand outlook.

Oil has been trading in a tight range since the second half of 2022. It was broadly huddled between $97-$65 per barrel on concerns that supply would outstrip demand.

To limit excess supply and stabilize prices, the OPEC+ group decided to cut production in April 2023 and has continued to extend these cuts ever since. Earlier, OPEC+ had announced a gradual increase in production to about 2% of global supply in October, but at the latest meeting they delayed it until January 2025.

OPEC+ production policies generally have a significant impact on global oil markets. When OPEC+ members decide to cut production, it usually leads to higher oil prices, while increasing production lowers prices because the group accounts for a significant share of global oil production and exports.

OPEC+ is a group of countries that meet regularly to decide how much oil to sell on the global market. When a cartel of producers cuts supply in response to falling demand, oil prices rise. However, over time, prices will generally return to lower levels, unless demand adjusts or supply is meaningfully cut.

Lower demand from China’s growth is weighing significantly on prices. China’s role in global oil markets is significant as it is the world’s second largest oil consumer and largest importer.

China’s oil demand has been falling for the past few months. This year, the country’s oil demand growth is expected to be around 180,000 bpd, compared to an average growth of 1 million bpd in previous years. This is due to factors such as the economic slowdown, the shift to electric vehicles and the expansion of high-speed rail networks.

Output from the US and other non-OPEC countries such as Canada and Brazil is rising, helping balance the global oil market and limiting price increases. US production is running near an all-time high. US oil production rose to a monthly record of 13.4 million barrels per day in August.

The United States has been producing more crude oil than any other country for the past six years. In 2023, the US averaged 12.9 million barrels of crude oil per day, a record for the country and the world.

Rising geopolitical tensions are also affecting demand prospects. The ongoing Russia-Ukraine war and conflicts in the Middle East may further weaken global growth leading to weaker demand for oil.

The ongoing Middle East conflict is worrying for global oil markets. Any damage to critical oil infrastructure in the region could disrupt oil production which could drive up prices. However, the extent of price fluctuations depends on the severity of the conflict and the response of major oil producers to manage supply levels.

As supply-demand dynamics remain in balance, prices remain stable. Meanwhile, a volatile US dollar, efforts taken by the Chinese government to boost their economy, easing geopolitical tensions and changes in production policies of major producers will influence prices in the coming days.

(The writer is Head of Commodities at Geojit Financial Services)