Brent eyes volatile Q4 2024 and underwhelming 2025 balance

BRENT crude oil futures have experienced significant volatility this year. After reaching a peak of US$90 per barrel in April, prices tumbled to around US$70 by September. This decline was fuelled by weaker-than-expected Chinese demand and broader economic uncertainties, alongside fears of oversupply despite production cuts by the Organization of the Petroleum Exporting Countries and its allies (Opec+). As the economic outlook in key markets deteriorated, speculative investors pulled back, leading to additional downward pressure on prices.

Several fundamental and geopolitical factors shaped the oil market this year. From geopolitical tensions to Opec+’s preference for elevated oil prices, and worsening trade relations, multiple key catalysts created wild price fluctuations. Additionally, shifts in transport patterns, such as the rise in electric vehicle sales and the expansion of high-speed rail networks in China, contributed to the slump in demand.

Brent prices tumbled further after Opec+ and the International Energy Agency downgraded demand growth forecasts for the third consecutive month. Coupled with a drop in Chinese imports for the fifth month, oil prices lost most of the upward momentum, or “war premium”, that had gradually built up due to the escalating crisis in the Middle East.

The fears of Israeli retaliation on Iranian oil infrastructure, which could strip away 3.6 million barrels of Iranian supplies, contributed to this “war premium”. However, recent assurances from Israel’s Prime Minister Benjamin Netanyahu to the US quickly turned the tide for oil prices.

This is Opec+’s third consecutive downward revision, and the group faces a dilemma around raising production quotas from December onwards. While Opec+ has deferred the rollback of “in-place” production cuts until December 2024, prices are anticipated to ease even further in 2025 as more supply re-enters the market and inventories grow.

Additionally, a combination of easing supply fears and a weakening demand forecast has sent oil prices tumbling, and without geopolitical factors in play, oil prices would likely have fallen even further – perhaps below the US$70 per barrel mark, given the current demand weakness.

Technical indicators suggest the possibility of short-term volatility for the remainder of 2024, driven by the interplay between production levels and investor sentiment. The downward-sloping trend line, which acts as immediate resistance, currently joins significant highs from 2022 until now.

There is potential for more consolidation and support in the price range of US$65 to US$68.68 per barrel, which includes the lows from 2021 and the recent low observed on Sep 10.

Geopolitical risks – such as developments in Libya and the Middle East – could also continue to influence fears of supply disruptions and cause short-term spikes in oil prices.

Global oil markets are currently grappling with demand-side challenges as the world adjusts to slower economic growth. With non-Opec supply increasing and structural shifts in demand patterns, the oil market may transition into a period of surplus supplies by late 2025.

This environment would be very conducive for oil prices to remain below the US$70 per barrel mark. For now, the ongoing geopolitical tensions will likely continue to support a price floor.

Meanwhile, traders are advised to monitor Opec’s strategy as it navigates between supporting prices and maintaining market share.

Oil markets have also become increasingly driven by speculative sentiment, with the “buying the rumour” mentality sidelining fundamental factors. Data such as API numbers, which reflected a substantial increase of 11 million barrels in US inventories, the possibility of Chinese recovery, and US production nearing its peak, alongside Opec+’s spare production capacity of nearly 5.9 million barrels per day, should be more central in driving market dynamics – not just speculative sentiment and Middle Eastern headlines.

The writer is senior market analyst at Phillip Nova