Oil price index started with a shudder on Wednesday, as it hits rock-bottom, drops by 4% to reach at lowest levels since July amid demand worries across big markets. The fuel prices have continued their streak of losses faced during the previous session.
Brent Crude futures are currently trading below $84 a barrel for the first time since the inception of Israel – Hamas tensions on October 7. The Brent Crude traded at $81.65 a barrel by 0333 GMT, while US crude dipped another 14 cents to $77.24 a barrel.
Both the benchmarks are currently at their lowest points since July 24, due to mixed economic data from China, and a strengthened dollar.
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Why are Oil Prices Dropping?
Looking at the economic and political situations across Asia, people were looking at rising oil prices, Despite the tensions of a war spillover in the Middle East, markets are less concerned about the issue and are not considering it enough, according to the analysts. This has led to a situation where oil drops 4% since July.
analysts from ING bank noted in a client briefing that, “the market is clearly less concerned about the potential for Middle Eastern supply disruptions and is instead focused on an easing in the tight oil supply conditions.”
Similarly an analyst from OANDA said, “traders will remain on high alert for signs of a wider conflict emerging in the region that could disrupt supplies, but it seems those fears are subsiding fast enough.”
Moreover, a recovery of oil supplies from the oil rich countries (OPEC) and a slow demand in the two biggest consumers of oil, United States and China have added pressure on the prices.
“OPEC crude exports are up by about 1 million barrels per day (bpd) since low in August, due to a seasonally lower domestic demand in the Middle East. It also seems there is too much supply to be absorbed by oil consuming nations,” UBS analyst Staunovo said.
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The Two Big Oil Markets
As discussed earlier, both of the biggest oil consumer markets, China and the US have shown a decline in their oil imports and the indicators are telling that this trend would continue for a bit longer.
According to the figures from American Petroleum Institute, US crude oil stocks have risen by almost 12 million barrels just last week. The Energy Information Administration (EIA) is also of the view that the oil production in the US will rise slightly, while the demand is expected to fall.
The EIA has revised its oil consumption figures from an increase of 100,000 bpd to a decrease of 300,000 bpd. Adding to it, the dwindling investor’s hopes of peak global interest rates has made oil more expensive for alternate currency holders, thus strengthening USD.
Moreover, if we look at China, the second largest economy in the world, has issued economic data recently which has also raised doubts about the demand outlook.
Although crude oil imports showed a strong growth in October, the pace of contraction in the goods and services exports have exceeded all expectations, fueling fears of a critically low demand in forthcoming months.
A City Index analyst Fiona Cincotta said, “the data signals show a continued decline in the Chinese economic outlook driven by deteriorating demand in the country’s largest export destination: the West.”
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Will Oil Prices Continue to Fall In Future?
The premium on spot trades over future trades in the Brent contracts are at a 2.5 months low, indicating less concerns about supply deficits. The announced cuts of 2 million bpd by the six OPEC countries have also not followed the trajectory as expected and has remained at just 600,000 bpd below April levels.
Mizuho analyst Robert Yawger said, “there are concerns in the oil markets about both rising supply and sliding demand, thus It’s certainly not a tight market right now.”
However, on the brighter side the oil producing nations are expecting a quick uplift in the global economy driving high fuel demand, despite inflationary pressures and economic challenges across the globe.