The oil market has shown remarkable resilience to geopolitical risks in recent months, with the conflicts in Ukraine and the Middle East having little impact on prices of late.
Geopolitical risk premiums have led to sporadic price rises over the past year, but the physical markets have adapted to trade flow shifts without too much trouble, analysts said at the APPEC conference by S&P Global Commodity Insights this week.
The re-routing of Russia’s oil shipments away from Europe and into Asia and the re-routing of oil tankers via the Cape of Good Hope away from the Red Sea route took months, but there isn’t any oil shortage in any part of the world now.
Part of this is due to underwhelming demand, including in the world’s top crude oil importer, China.
Signs of weak demand and weakening refining margins have weighed on oil prices and market sentiment, prompting speculators and money managers to slash their bullish bet on oil futures to the lowest on record dating back to 2011.
Following last week’s selloff, prices somewhat stabilized on Monday before crashing by 4% on Tuesday after OPEC trimmed its demand view in a second consecutive monthly report.
Brent Crude prices crashed below $70 per barrel, and the U.S. benchmark, WTI Crude, fell below $66 a barrel on Tuesday as both benchmarks settled at a nearly three-year low – at their lowest level since December 2021.
Concerns about demand have been weighing heavily on the market in recent months, capping any gains stemming from geopolitical flare-ups and limiting the upside from supply disruptions such as production shut-ins due to hurricanes in the U.S. Gulf of Mexico or to the political strife between rival governments in Libya.
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Last week, refining margins across Asia fell to their lowest level for this time of year since 2020, which could lead to more curbs in run rates at Asian refiners, including in China.
The refining margins in the regional hub Singapore plunged by 68% for the first week of September compared to the first week of August, per data from LSEG cited by Reuters.
As a result of slumping margins and rising fuel supply amid weakening demand, analysts expect further cuts in refining utilization going forward, which does not bode well for oil demand in the world’s most important growth market, Asia.
This week, OPEC also fed the market’s bears with a second consecutive downgrade to its oil demand growth forecast for this year and next. The cartel, which just last week delayed to December from October the start of the easing of its production cuts, lowered its global oil demand growth estimate in its Monthly Oil Market Report published on Tuesday.
Global demand will grow by 2.03 million barrels per day (bpd) in 2024, OPEC said, down from its previous estimate of 2.11 million bpd growth. For 2025, demand growth is now seen at 1.74 million bpd, down from 1.78 million bpd in last month’s report. Although the downward adjustments seem minor, the second consecutive revision of OPEC’s forecasts suggests that the cartel may have overestimated demand growth, especially in China, when it published its initial forecasts for 2024 more than a year ago.
Chinese demand growth for 2024 was cut to 653,000 bpd from 700,000 bpd, and OPEC noted that “headwinds in the real estate sector and the increasing penetration of LNG trucks and electric vehicles are likely to weigh on diesel and gasoline demand going forward.”
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At the APPEC event, oil trading giants Trafigura and Gunvor expressed bearish views on prices and demand.
Ben Luckock, Global Head of Oil at Trafigura, said early on Monday he expects Brent to drop into the $60s handle, although he warned that traders shouldn’t put all their eggs in the basket of shorts. Gunvor’s co-founder and chairman Torbjorn Tornqvist told the conference that Brent’s fair value is now $70 a barrel as supply outpaces demand.
By Tsvetana Paraskova for Oilprice.com
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