The Week in Oil: OPEC+ Supply Concerns, Middle East Risks Take Center Stage

By Giulia Petroni

Here's a look at what happened in oil markets in the week of Sept. 23-27, and what the focus will be in the days to come.

OVERVIEW: Oil prices are headed for weekly losses as prospects of increased supply from Libya and the broader OPEC+ group fuel concerns of an oversupplied market next year. Brent crude, the international oil benchmark, currently trades at around $71 a barrel, while the U.S. oil gauge West Texas Intermediate is around $68 a barrel. Prices plunged more than 3% this week and are down around 10% on the month despite widespread fears of a broader war in the Middle East, China's fresh wave of stimulus measures and U.S. interest-rate cuts.

MACRO: China unveiled a new set of bold measures this week to revive the economy and arrest the housing slump, boosting growth-sensitive commodity prices. But worries over lackluster demand in the world's top crude importer still linger, with analysts wondering whether the move will be sufficiently robust to support economic and oil-demand growth.

Meanwhile in the U.S., consumer confidence dropped in September, cementing expectations of more aggressive rate cuts by the Federal Reserve. The third estimate of second quarter GDP showed economic growth accelerated in the second quarter amid strength in consumer spending, while the core personal consumption expenditures price index--the Federal Reserve's preferred inflation measure--continued to show muted growth in August, providing more evidence that the U.S. central bank is on the right track with the recent rate cut.

GEOPOLITICAL RISKS: Fears of a broader war in the Middle East have dominated markets this week after Israel dramatically escalated strikes against Iran-backed militant group Hezbollah in southern Lebanon, killing hundreds of people and wounding thousands. International leaders are calling for a temporary pause in fighting, hoping to avert a ground war that could escalate into a full-on regional conflagration, but hopes of an imminent ceasefire deal in both Lebanon and Gaza appear to be slim.

In Libya, news that rival administrations agreed to appoint a new central bank governor contributed to the weakening of oil prices this week, as the deal could bring more than 500,000 barrels a day back on the market after the political impasse crushed the country's oil production and exports. Libya plunged into a deep political crisis in recent weeks, with rival governments fighting over control of the central bank, the only internationally recognized depository of oil revenues.

SUPPLY AND DEMAND: A Financial Times report that Saudi Arabia is ready to abandon its unofficial price target of $100 a barrel for crude as it prepares to increase output has driven crude significantly lower this week, fuelling the idea that the Kingdom is no longer willing to give up market share and has sufficient alternative financing options to weather a period of lower prices. Most analysts expect the OPEC+ alliance to proceed with its planned unwinding of voluntary production cuts starting from December, a move that is likely to add further pressure to prices and reinforce concerns over sluggish demand.

Earlier this week, OPEC also unveiled its oil-market outlook to 2050, saying global demand for oil is set to climb over the next two decades and that peak demand isn't on the horizon. The report clashes with the International Energy Agency's predictions, as the Paris-based organization said earlier this year it expects oil demand growth to peak by 2029.

Meanwhile, the latest weekly report from the Energy Information Administration was positive for oil, but failed to spark a significant price reaction. Data showed U.S. crude oil inventories fell by 4.5 million barrels to 413 million barrels in the week ended Sept. 20, against expectations of an 800,000 barrel decline. Gasoline stockpiles were down at 1.5 million barrels, while distillate fuel stocks dropped by 2.2 million barrels.

Prices found some underlying support from concerns over the impact of Tropical Storm Helene on U.S. production, with the Bureau of Safety and Environmental Enforcement estimating that about 25% of crude oil production and roughly 20% of natural gas output in the U.S. Gulf of Mexico were shut in as of Thursday.

WHAT'S AHEAD: Next week, traders will be focusing on OPEC's Joint Ministerial Monitoring Committee scheduled for Wednesday, hoping to get more cues on the group's next policy moves. According to Commerzbank Research analysts, the committee is likely to reaffirm that the implementation of OPEC+'s output increase plans depend on market conditions, while also stressing the need to comply with production targets and implement compensatory cuts.

At a macro level, investors are expected to keep an eye on U.S. JOLTS Job Openings on Tuesday and monthly non-farm payrolls on Friday. "The JOLTS report could steal the show on Tuesday given how the Fed's focus has shifted from inflation to employment, as highlighted by the outsized rate cut in September," StoneX's market analyst Fawad Razaqzada said in a note to clients. "If the job market continues to weaken, the chances of another 50-basis point rate cut at the Fed's November meeting will increase, which could put additional pressure on the dollar."

Write to Giulia Petroni at giulia.petroni@wsj.com

(END) Dow Jones Newswires

September 27, 2024 10:48 ET (14:48 GMT)

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