Brent crude oil futures dropped below $70 per barrel on Tuesday, despite a tropical storm in the Gulf of Mexico which threatens to become a hurricane and shut down close to half of the Gulf Coast production in the coming days.
The release of US non-farm payroll data on September 6 capped a week of disappointing labor market reports, intensifying concerns about a slowdown in the world’s largest economy.
Market sentiment was partly and temporarily lifted by OPEC+'s decision to delay its planned 180,000 bpd production increase until December.
However, all these factors were not enough to sustain higher prices.
On supply, OPEC+ crude oil production in August dropped by 373,000 bpd to just under 40.68 million bpd, the lowest since July 2021, primarily due to a 323,000-bpd decline in Libya following a force majeure at the El Sharara field amid an internal conflict.
The future production outlook hinges on a resolution of the conflict in Libya, Iraq and Kazakhstan’s adherence to the compensation plans, and the broader geopolitical landscape.
China’s economic indicators – property investment, retail sales, manufacturing PMI and construction activity – all declined in August, leaving export growth as the sole bright spot this year.
Falling crude prices lifted refinery margins, boosting runs particularly among the independents.
Still, weakening road fuel demand growth and expected cuts to export quotas led to a 50,000-bpd downward revision in refinery runs.
September runs are set to rise by 1 million bpd from July, but still 600,000 bpd below last year.
Real-time indicators in China paint a relatively bearish picture.
While the aviation activity index remains above last year’s levels, sluggish road transport is more concerning.
As road transport represents a bit less than 30% of China’s oil demand, this slowdown is having a substantial impact on overall China’s demand.
In the road transport sector, the shift from ICE vehicles to electric vehicles (EVs) continues to impact oil demand.
The global EV market saw a slight slowdown in July, with sales dropping 10% to 1.32 million units from June, though it still remained the strongest July on record.
Year-over-year sales climbed 10%, reflecting the sector's steady growth.
China led with 931,500 EVs sold, achieving a 50% EV market share for the first time.
Europe and the US posted more modest gains. China’s gasoline demand may be close to peaking in the next couple of years as a result of this increase in EVs, albeit China’s overall oil demand is still far away from peaking due to the expected petrochemical and aviation growth.
Next week, as the Federal Open Market Committee (FOMC) meeting on 17-18 September approaches, where a 25 to 50 basis points rate cut is anticipated, market attention is focused on the upcoming economic data releases.
The Consumer Price Index (CPI) is set for release on 11 September, followed by the US Monthly Federal Budget and Producer Price Index (PPI) on 12 September.
Market consensus expects the year-on-year inflation rate to decrease to 2.6%, down from 2.9% in August. US unemployment is projected to remain at or below 4.3% in September, with most analysts seeing little need for a deeper 0.5% rate cut.
A quarter-point cut may have a limited effect on boosting oil prices, while a more significant cut could weaken the US dollar, supporting demand but potentially strengthening recessionary fears.
China’s unemployment report for August, due on 13 September, follows a rise in the jobless rate to 5.2% in July from 5% in June, with expectations of possibly further increases to 5.4% by the end of the quarter.
Market sentiment remains notably bearish, which is being adequately reflected in the ongoing Asia Pacific Petroleum Conference (APPEC) in Singapore, where traders are voicing growing concerns over the future of the oil price.
Large trading houses’ expectations of oil prices in the $60 per barrel range underscores the anxiety, amplified by China's weak macroeconomic data.
Despite this prevailing sentiment, OPEC+ still has the potential to shift the market dynamics through stronger messages about the extensions of the production cuts.
While the sentiment is mostly bearish, fundamentals still point to drawing inventories between now and the end of the year, which is incompatible with a contango term structure. What’s needed is some positive news from China and the US, which may shift the sentiment in the coming days/weeks, before supply and demand fundamentals reassert their force on prices.
