Oil prices have slid downward from the latter part of July through the early part of September, with the price of Brent crude falling below $75/bbl and the price of WTI falling below $70/bbl. Downward pressure continues to be put on oil prices by disappointing economic news, which has become a theme for 2024, and has been associated with all three major economies—the U.S., China and the EU.
The August jobs report shows that the U.S. added 142,000 jobs, which is well below the average monthly gains of 202,000 over the previous 12 months. The less-than-stellar jobs report for August follows the significant downward revision of 818,000 jobs for the period of April 2023 to March 2024.
Moreover, the underlying data are not robust, with private sector jobs increasing by only 74,000 in August, while full-time jobs decreased by 438,000 and part-time jobs increased by 527,000. Additionally, the number of manufacturing jobs decreased by 24,000.
The loss of manufacturing jobs is consistent with the latest Purchasing Managers’ Index (PMI) from the Institute for Supply Management (ISM) which came in at 47.2. While the latest reading is an increase from 46.8 in July, the reading is still below 50 (for the fifth consecutive month), which indicates contraction.
Furthermore, there has not been a rebound in the manufacturing sector, despite the passing of the Inflation Reduction Act, with essentially no increase in the number of people working in the manufacturing sector since September 2022. Even with the post-COVID rebound, the number of people working in the manufacturing sector is no more than in November 2019.
As has been the case, China’s economic data continues to cause concern. The manufacturing sector, according to China’s National Bureau of Statistics, is at its lowest level since February and has been in contraction for the last four months. China’s service sector is also showing weakness with growth slowing in August.
Europe’s economy continues to be mired in a period of very low growth, in part, because of the struggling economy of Germany, with GDP growth forecasted to be just 0.1% for 2024. Recent business surveys indicate that export orders continue to decrease, in part, because of the weakness in China’s economy.
The German automotive industry has been hit especially hard—not only the OEMs, but also the network of suppliers to the automotive sector, which together represent a major source of employment.
Given all the negative news, the sentiment of oil traders has become very bearish. Traders of WTI crude have reduced their net long positions six out of the last eight weeks, which has resulted in net long positions decreasing by 60% and falling to the lowest level since early February. Traders of Brent crude also have decreased their net long positions significantly during this period and are now at an exceptionally low level.
So where do oil prices go for the rest of the year?
The current low prices have led OPEC+ to delay the unwinding of voluntary cuts of 2.2 MMbbl/d (out of the total cuts of 5.86 MMbbl/d), which were scheduled to start unwinding in September and now are planned to start being phased out in December and continuing until November 2025.
Currently, Stratas Advisors is forecasting that oil demand will increase by 1.2 MMbbl/d in 2024 and by 2.08 MMbbl/d in the fourth quarter in comparison to fourth-quarter 2023. With this demand forecast, Stratas Advisors is forecasting that demand will outpace supply during the third and fourth quarters. The expected deficit during the third and fourth quarters stems, in part, because we are forecasting that non-OPEC crude production will only increase by 320,000 bbl/d in comparison to 2023.
With expectations for more favorable fundamentals for the oil market and improvement in the sentiment of oil traders during the next few months, we are forecasting higher oil prices, with the price of Brent crude moving back above $80/bbl. The main downside risk is associated with faltering demand growth. There is also the risk that the cooperation among members of OPEC+ could deteriorate, but we think that this is unlikely as long as Saudi Arabia is willing to maintain its production cuts.
There is less upside potential associated with the fundamentals, but there is a potential boost to prices from geopolitical developments. The two major conflicts continue—and the direction of the two conflicts is toward escalation—which can lead to unexpected and unintended consequences that could rock the oil markets. The events surrounding the reduction in exports from Libya is another type of a geopolitical development that can affect the oil market.
John E. Paisie is president of Stratas Advisors.
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