July 19, 2024

Weekly Oil Losses Loom as Supply Worries Fade

Oil prices continued their slide Friday, poised for significant weekly losses as supply concerns from the Middle East dissipate. Growing signs of weakening demand and robust U.S. production further pressured the market.

Early price gains, prompted by reports that OPEC+ might extend production cuts, quickly faded. One of our analysts pointed out, “The war risk premium built into oil prices has steadily eroded as tensions in the Middle East cool. A potential ceasefire signals a further decline in this geopolitical risk factor.”

This comes after a substantial buildup in U.S. crude stockpiles and disappointing refinery output. “Demand seems less robust than anticipated,” notes another analyst, “refiners are clearly feeling the pinch and that’s not good for crude.”

Adding to the pessimism is a slowdown in expected Chinese refinery demand and the surprisingly strong rebound of U.S. oil production after a weather-related slowdown.

While OPEC+ hasn’t engaged in formal discussions yet, there is speculation about extending cuts beyond June to shore up prices. However, an analyst warns, “OPEC+ needs to tread carefully; extending cuts without substantial demand recovery could backfire. ”

Option 2: Focus on Evolving Global Picture

Oil prices are set to register steep weekly losses this week, a dramatic shift after weeks of volatility driven by Middle East conflict. Analysts highlight easing risks of supply disruptions, concerns over demand, and a resurgence in U.S. production as the key forces driving the downturn.

The recent geopolitical premium placed on crude is quickly dissipating. An analyst comments, “Hopes for a ceasefire and easing tensions are steadily removing the war risk factor from oil’s price.”

Worries about demand are amplified by both a sizable increase in U.S. crude stocks and weak refinery runs. “This paints a picture of sluggish demand,” observes an analyst, “and refiners processing less crude isn’t a bullish sign.”

Furthermore, expectations of robust demand from China have been downgraded due to reduced refinery activity. Meanwhile, U.S. production seems surprisingly strong. “February saw a significant bounce back in production, which is another bearish weight on the market,” notes an analyst.

While the oil market remains dynamic, there is growing speculation that OPEC+ could move to extend its current production cuts to counter falling prices. However, the effectiveness of this strategy is debated within our analyst team, with some highlighting the risk of further price erosion if demand fails to rebound decisively.

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