The fluctuation of crude oil market in the game between supply and demand will be intensified

The Organization of the Petroleum Exporting Countries (Opec) cut its forecast for oil demand growth in its latest monthly oil market report, raising concerns in the market. At the same time, the outside world is also continuing to pay attention to the tensions in the Middle East, and the future volatility of the crude oil market will be intensified.

A drop in demand expectations weighed on sentiment

On October 14, local time, Opec released its monthly oil market report, lowering its forecast for global oil demand in 2024 and 2025. This is the third time in a row that Opec has cut its global oil demand forecast for this year and next.

According to the report, Opec revised its forecast for annual global oil demand growth in 2024 from 2.03 million barrels per day to 1.93 million barrels per day, and the adjusted annual average oil demand is expected to be 104 million barrels per day. Opec said the adjustment was based on actual data received by the organization and lower expectations for oil demand in some regions. The adjusted annual growth forecast for global oil demand in 2024 remains well above the pre-COVID-19 historical average of 1.4 million BPD.

In the report, Opec also revised its forecast for annual growth in global oil demand in 2025 to 1.64 million barrels per day from 1.74 million barrels per day, with full-year adjusted demand forecast at 106 million barrels per day.

Opec's latest monthly report has also led most oil futures traders to buy into the "oversupply" argument put forward by Wall Street giants such as Goldman Sachs and Morgan Stanley - that from 2025 onwards there will be more supply than demand in the oil market, thus keeping crude prices weak.

Market sentiment was pressured by the news. As of the close of the 14th, the New York Mercantile Exchange for November delivery of light crude oil futures prices fell 1.73 dollars, or 2.29%, to 73.83 dollars a barrel; London Brent crude for December delivery fell $1.58, or 2.0 per cent, to settle at $77.46 a barrel.

This comes after the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) cut their fourth-quarter global oil consumption estimates by 140,000 barrels per day and 200,000 barrels per day, respectively. Later this week, the IEA will also update its monthly market report and is expected to further downgrade its outlook.

According to Reuters, with three consecutive cuts to its overall oil demand forecast, Opec is finally starting to abandon the strongly bullish attitude it has held this year. "The drop in demand is really worrying and bodes well for continued weakness in oil prices going forward." Peter Cardillo, an analyst at Spartan Capital Securities, said in a statement.

Opec said in a statement in early September that eight Opec and non-OPEC oil producers decided to extend the voluntary production cuts of 2.2 million barrels per day that were originally scheduled to expire at the end of the month to the end of November, and withdrew this part of the production cuts month by month from the beginning of December, but will flexibly grasp the rhythm of the withdrawal of production cuts depending on market conditions.

The situation in the Middle East raises the risk of higher oil prices

Recently, the situation in the Middle East has heated up rapidly, and the global market has been increasingly worried about the disruption of oil supply, and international oil prices have spiralled higher. While relatively weak demand in the global market has partially curbed the climb in oil prices, supply chain uncertainty and geopolitical risks are still providing support.

International oil prices rose on fears of a possible Israeli air strike on Iranian oil facilities. The price of Brent crude oil futures in the British North Sea surpassed 80 dollars per barrel for the first time since August. Iran is an important oil producer in the world, and the key oil shipping route of the Strait of Hormuz, if the conflict continues to escalate and lead to the blockage of this passage, major oil importers in Europe and Asia will have to find alternative supplies, which will further push up global oil prices.

Citi analyst Francesco Martocha and others said in a report on the 14th that the forecast price of Brent crude oil in the bullish scenario for this quarter and next quarter was raised from $80 to $120 a barrel. The probability of the bullish scenario materializing has increased from 10% to 20%. 'Due to weak underlying oil market fundamentals, there is a 60% probability that oil prices will remain at $74 a barrel in the fourth quarter and $65 a barrel in the first quarter of next year in the base case scenario,' Citi said. The bearish scenario calls for $60 in the fourth quarter and $55 in the first quarter of next year.

According to a recent article published on the website of the British weekly Economist, if supply disruptions lead to demand outstripping supply, oil prices may first rise to a level sufficient to suppress demand, and then start to fall. Once crude oil prices reach $130 a barrel, which is close to the all-time high of 2022, it will trigger "demand destruction."

While the global economy is not as dependent on Middle East oil as it used to be, and global oil demand is weaker, a major supply disruption could still send shockwaves through the global economy through higher energy prices and higher inflation. A professor at the University of Zagreb in Croatia, Helvoje Krajic, said that if there is a wider conflict in the Middle East, oil prices will rise sharply, and the European economy will suffer greatly. Rising energy prices are set to increase the risk that Europe's sluggish economic growth will stagnate and inflation will rebound.

Tamas Varga, senior market analyst at crude brokerage PVM Oil Associates, said an attack on Iranian oil facilities or disruption to traffic in the Strait of Hormuz would severely disrupt the supply and demand situation and push oil prices above $90. This is bad news for central banks at the beginning of their monetary policy shift, and the impact of energy inflation over the past two years has been profound.

Crude oil market volatility may increase

At present, some analysts pointed out that although the oil price has fallen, the situation in the Middle East is complex and volatile, and international oil prices may still fluctuate significantly.

According to the US consumer news and business channel (CNBC), S&P global vice chairman and energy expert Daniel Yergin said that because of the Middle East tensions continue to rise, the global economy is entering an unprecedented special period. Byane Hildrop, chief commodities analyst at Seanbank in Sweden, said that if the situation gets worse and the Strait of Hormuz is closed for a month or more, then Brent crude oil prices could soar very high and the world economy would be in trouble.

However, Robbie Fraser, global commodities analyst at Schneider Electric, said that while geopolitical risks have pushed oil prices above $70 a barrel, demand concerns continue to limit further gains, and the global economic environment continues to weigh on oil prices.

Morgan Stanley and Goldman Sachs have recently released research reports showing that the entire oil market is expected to shift from a slightly tight supply and demand balance to a potential surplus after late 2024 or early 2025, and Goldman Sachs even predicts that Brent crude oil trading prices may fall to the periodic low of $61 per barrel.

Analysts believe that the oil market is still in a game between supply and demand. The supply side is still favorable in the short term, there is a tightening expectation of oil supply, coupled with the opening of the winter heating season, energy demand will increase, so the possibility of a sharp fall in short-term oil prices is unlikely. The demand side is the main driver of suppressing oil prices, the global economy has a slowing trend, facing increasing pressure of recession, which may be the main factor restricting oil prices in the medium and long term. In general, the crude oil market will intensify the shock under the background of increasing supply and demand game.