In a move that surprised many market watchers, the oil sector faced a notable downturn as prices dipped by approximately 3% on Monday. This decline comes on the heels of OPEC+ revealing their plans to initiate the rollback of some voluntary production cuts sooner than previously anticipated. The backdrop of softening oil prices and looming demand concerns, especially as we edge closer to 2025, seems to have amplified the market's reaction.
West Texas Intermediate (CLUSD) futures saw a plunge, trading below $75 per barrel, while Brent (BZUSD), the global benchmark, hovered around $78.60 during midday trades. Oil futures haven't had a good run lately, as they are down about 13% from their April zenith.
Monday’s sell-off wasn't just a light breeze but was described as a heavy gust by those in the know. Rebecca Babin, US Senior Energy Trader at CIBC Private Wealth, remarked that the sell-off was "exacerbated by technical pressure and limited enthusiasm for buying the dip given the tepid demand."
The key driver behind this market movement was the weekend announcement from the OPEC alliance, led by Saudi Arabia. Their plan entails extending the existing reduction of 3.6 million barrels per day until the end of the next year. But the twist? They will begin to unwind an additional 2.2 million barrels per day of cuts over the coming 12 months, starting from this October.
However, the decision to lift these cuts has met with some skepticism. Peter McNally, Global Head of Analysts at Third Bridge, indicated in a note on Monday that unless there is a "material upside surprise in demand," the decision to lift previous cuts could be seen as premature.
JPMorgan analysts categorized the move as "market neutral" for oil balances and prices in 2024. Nevertheless, they are still forecasting a demand slowdown for the next year. Natasha Kaneva, head of JPMorgan's global commodities strategy team, noted, "We have been advocating for the group to unwind some of the voluntary reductions in 2024 when demand conditions permit (at the expense of moderately lower prices). Otherwise, OPEC’s massive effective spare capacity — a historic 4.1 million barrels per day high at a time of record demand — will make it progressively challenging to accommodate further significant supply reductions when needed in 2H25."
The slide in crude prices has had a ripple effect, easing gasoline prices across the board. The national average for gasoline stood at $3.53 per gallon as of Monday, marking a drop of $0.06 from the previous week, which is the largest weekly decline seen in 2024, according to AAA data. Tom Kloza, Global Head of Energy Analysis at OPIS, humorously pointed out last week that "cocktail party chatter is likely to focus on plunging retail numbers" given the significant drop in wholesale gasoline prices.
This evolving situation in the oil market presents a mix of challenges and opportunities for traders. While the short-term outlook remains uncertain, the strategic responses from OPEC+ and shifts in global demand patterns will be key factors to monitor closely.
