70-75 dollars, the new normal for Brent crude oil prices?

Brent crude oil prices appear to be stabilizing in the $70-$75 per barrel range as escalating tensions in the Middle East fail to push prices higher.

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Recent market dynamics reveal a worrying balance between weak global demand growth and a positive supply outlook, leading investors to reassess the fundamental factors influencing oil prices.

As geopolitical uncertainties persist, analysts suggest that while recent price swings may offer temporary relief, they are unlikely to signify a lasting recovery in the oil market.

Geopolitical tensions eclipsed

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Oil prices saw a decline earlier today due to a combination of oversupply and disappointing global demand growth.

Although prices have rebounded slightly in response to growing tensions in the Middle East, analysts warn that this increase could be short-lived.

The ongoing conflict between Israel and Hamas has yet to significantly disrupt oil supplies to the region, which holds about half of the world’s oil reserves.

Matt Stanley, Head of Market Engagement for EMEA and APAC at Kpler, commented:

Over the past year, markets have had little concern about supply being affected. The risk premium lies in the threat of wider conflict in the region.

This sentiment reflects broader apprehension about geopolitical tensions overshadowing the fundamental factors driving the oil market.

Oversupply threatens oil market

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Despite the geopolitical climate, analysts are focusing on oversupply in the oil market.

OPEC and its allies have indicated plans to increase crude oil production by 180,000 barrels per day starting in December, a move that coincides with a period of weak global demand.

This increase will result from the cancellation of certain voluntary production reductions by eight members of the OPEC+ group.

Furthermore, Saudi Arabia has indicated that it prefers to regain market share rather than maintain high oil prices, underscoring its reluctance to tolerate non-compliance with production reduction quotas.

Iraq and Kazakhstan were notably cited for their overproduction of crude oil over the past eight months.

In Libya, a political conflict that previously limited oil exports has been resolved, potentially allowing the country to increase its oil shipments.

This additional supply could further lower oil prices in an already fragile market.

Weak global demand reinforces downtrend

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Global oil demand remains fragile, with consumption growth lagging behind supply increases.

The International Energy Agency (IEA) reported that demand increased by only 800,000 barrels per day in the first half of 2024, a sharp decline from growth of 2.3 million barrels per day observed in 2023. For the year, demand is expected to increase by only 900,000 barrels per day.

OPEC’s demand forecast appears overly optimistic, with growth of 2.0 million barrels per day for the year. Stanley remarked:

Demand forecasts simply did not materialize as many hoped. I’m not saying that everything has collapsed, far from it, but simply that the forecasts which seemed somewhat illusory at the start of the year have proven to be illusory.

Added to these challenges is the slowdown in Chinese manufacturing activity, which is raising doubts about the recovery potential of the world’s largest importer of crude oil.

James Hyerczyk, analyst at FXEmpire.com, noted:

The weak response to Beijing’s fiscal stimulus raises doubts about the likelihood of a significant recovery in Chinese oil consumption.

OPEC committee meeting Wednesday

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Amid weak demand and an expected increase in supply, the OPEC Joint Ministerial Monitoring Committee is expected to meet on Wednesday.

The committee will discuss market dynamics and is expected to provide recommendations to OPEC+ ministers.

Analysts speculate that the committee will maintain current production policy, but particular attention will be paid to whether it will address Iraq and Kazakhstan’s failure to meet their respective production reduction quotas.

In September, Brent crude oil prices on the Intercontinental Exchange fell more than 8%, mainly due to China’s economic woes and increased supply.

Currently, the December Brent crude oil contract is quoted at $73 per barrel.

Although prices have rebounded today, traders should likely remain focused on the gloomy outlook for demand growth, especially as a potential oversupply looms on the horizon.