Crude markets are faced with a bloodbath. Posting its biggest weekly drop in 11 months, the US crude oil hit its lowest level since June 2023 last Friday, putting it on pace for its worst week in nearly a year. Earlier in the session, the US crude hit a low of $67.17 per barrel, shedding almost eight per cent. The West Texas Intermediate October contract, however, finished the week a bit higher, at $67.67 per barrel. Year to date, this has been a fall of 5.6pc.

Global benchmark Brent November contracts closed the week at $71.06 per barrel, down $1.63, or 2.2pc. Year to date, Brent prices have fallen by 7.8pc.

This was the worst week for oil markets since October last year. Interestingly, this happened despite the announcement of the Organisation of the Petroleum Exporting Countries (Opec) — and its allies in Opec+ — to defer bringing their scheduled additional output in the market from October and an almost seven-million-barrel weekly drop in US crude inventory. That makes the situation worse.

The ongoing downslide in the oil market prices almost forced Opec and its Russina-led allies to delay the unwinding of its production cuts for at least the next two months. As per previous Opec+ announcements, the group was to increase its crude from early October. That has now been deferred until December. And even then, whether markets would permit Opec+ to open its taps by a small margin remains a big issue.

Pundits predict potential future price cuts to $60 per barrel as global oil demand slows even as supply from non-Opec producers rises

The situation is dire from the oil producers’ perspective. Further to this, there are signs that more oil barrels could hit the markets. If that happens, markets will be under increased pressure.

Hints are pouring in that the stuttering Libyan output is to get back into the markets sooner rather than later. Libyan output was slashed in half last week after authorities in the eastern region of Libya shuttered more than 500,000 barrels a day in a clash with the Tripoli-based government over control of the central bank. The disruption came on top of the halt of Libya’s biggest oil field, Sharara, earlier in August.

However, last Tuesday, Sadiq Al-Kabir — the central bank governor whose attempted ouster precipitated the crisis — said there were “strong” indications political factions are nearing an agreement to overcome the current deadlock.

In the given circumstances, even if Opec+ opts to keep the planned additional output at bay, even beyond November, how long it would be able to do so remains a major issue. Several major Opec+ stakeholders are already itching to increase their output.

The United Arab Emirates (UAE), a key player in the oil markets, has been keen to increase its output to match its enhanced output capacity of 4.85m barrels per day. Earlier this year, Opec+ had opted to increase the UAE output quota. But, that did not satiate the country’s bid to increase its output even further. The UAE’s desire to pump more has stirred tensions within the group in the past, the media is reporting.

In the meantime, as per reports, Iraq, Russia, and Kazakhstan are also not fully complying with their quota curbs, s they seek to maximise revenues. Reuters also reported that Venezuela’s August oil exports hit their highest in more than four years, according to shipping data, fueled by expanded shipments to China, the US, and Europe as the risk of fresh US sanctions grew amid an electoral dispute.

All this is taking place in an era when crude supplies from the US, Guyana, Brazil, and Canada are expected to go up.

With global oil demand under serious scrutiny, what if all these additional barrels get into the market? Pundits are concerned.

The Bank of America has slashed its oil forecast 2025 to $75 for Brent, down from $80 previously, and to $71 for the US benchmark from $75.

Meanwhile, Citi anticipates that Brent prices will average in the $60 range next year as the market is expected to enter a substantial surplus.

We could see $60-per-barrel oil prices next year if Opec+ fails to implement more production cuts, Citi said in a note to clients last Wednesday, citing slowing demand and strong supply coming from non-Opec producers.

Further into its doomsday oil pricing, Citi said that once Brent crude prices drop to the $60 range, they could get pushed down further to $50 a barrel due to financial flows before rebounding.

Furthermore, Citi noted that geopolitical tensions are not having a huge, direct impact on oil prices. While geopolitical tensions have been temporarily raising oil prices, each rebound is weaker than the previous. Additionally, the bank noted that the market now seems to understand that geopolitical tensions do not immediately mean supply disruptions. That makes every major Israel-Gaza headline simply an opportunity to sell on the temporary upswing.

Citi is concerned that if Opec refrains from extending output cuts beyond its current plan, the market could lose confidence in the cartel’s ability to defend oil at a $70 mark.

Fundamental demand concerns have created a kind of ‘imbalance’ in the market, Commerzbank commodity strategist Barbara Lambrecht noted. Reports of production outages barely caused the oil price to rise, while the prospect of possible higher supply put prices under heavy pressure, she underlined.

Goldman Sachs responded to this shifting outlook last week by cutting its average 2025 Brent forecast and price range by $5 per barrel, citing slower demand in China, the world’s largest crude importer.

All this would translate into savings for crude import-dependent countries like Pakistan. Would that translate into relief for the common people? That is another story. In a deteriorating balance of payments scenario, a weak government in Islamabad will not be able to counter the International Monetary Fund’s conditionalities; one needs to concede.

Published in Dawn, The Business and Finance Weekly, September 9th, 2024