The US benchmark, NYMEX futures, slipped below $70 a barrel last week while its Asian counterpart, Brent crude, traded at a six-month low of $72 a barrel. A similar sell-off was witnessed in the domestic futures as well, but a weak Indian rupee prevented major liquidation in the commodity.
Concerns over demand from the world’s second-largest consumer of oil, China, are adversely affecting the demand prospects of energy commodities. For the past several months, the Chinese economy has been facing challenges in areas like the property sector, exports, debt, unemployment, consumption, spending, and investment, affecting the demand for commodities like oil.
China was supposed to be the driving force of global oil demand growth this year. In the first 11 months of 2023, there appeared to be a robust increase in imports, but it has fallen well below the estimates of various agencies. There are also reports that China has used these increased barrels to build up its inventories rather than for domestic consumption.
An increase in global oil production also weighs on the short-term outlook for the fuel. Despite the ongoing output cut of OPEC-plus countries, oil output from the cartel rose for the third straight month in October. This was due to increased output from the small members of the group.
Meanwhile, the OPEC Plus producers’ cartel announced an additional output cut of 2.2 million barrels per day at its latest meeting. These additional cuts will be implemented in the first quarter of 2024. In addition, Saudi Arabia and Russia, the key players in the cartel, hinted that the cuts may be extended beyond the first quarter of 2024.
Interestingly, this aggressive move has failed to lift global oil prices as the decision was already anticipated. Moreover, there was a flurry of speculation that the OPEC Plus members had lost their ability to shake global oil prices due to increased US oil production.US oil output is currently running at record levels. As per the latest EIA report, monthly oil production from the US is 13.24 million barrels. This record-high output is serving as a fresh blow to the efforts taken by the OPEC Plus cartel to increase global oil prices by adopting deeper production cuts.
Moving forward, the ongoing supply-demand dynamics are still not supportive of the prices. The US output and exports are expected to be held firm in the coming months, and small members of OPEC are likely to increase their output gradually. These increased barrels are supposed to replace the additional shortage in production from top OPEC Plus members. Besides, agencies like the IEA predict a softer oil demand for the rest of the year and expect this trend to continue into the next year.
At the same time, the possibility of an interest rate cut may lift the global growth outlook and the demand for energy commodities. In the latest US FOMC meeting, the US Fed kept rates unchanged and hinted that the prevailing high rates could be cut in the next year. A recovery in China’s economy may also contribute to a positive outlook on oil later.
(Head of Commodities at Geojit Financial Services)
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