Crude Oil Prices Plunge as Supply Concerns Rise Amidst Cheating Concerns

Crude oil prices have taken another hit this week, failing to join the recent rally in other commodity sectors spurred by China's stimulus measures. According to a note published by Saxo Bank, the focus has shifted from an improved demand outlook to the prospect of increased oil supply entering the market at a time when it is not needed.

Brent crude, the global benchmark, has fallen back after failing to break above $75 earlier this week. The current outlook remains challenging, with analysts expecting a sustained dip below $70 to potentially push prices down towards $65. A move above $75 would be needed to trigger renewed buying interest from speculators, many of whom are currently holding net short positions.

"The 70s are the new 80s for Brent," said Ole Hansen, Head of Commodity Strategy of Saxo Bank, citing slowing demand growth and ample spare capacity among OPEC's GCC members, who have borne the brunt of voluntary production cuts. However, they caution that a supply-driven slump into the 60s cannot be ruled out, particularly if OPEC+ unity is challenged by persistent cheating from members like Iran, Kazakhstan, Russia, and the UAE.

The recent price weakness is largely attributed to the potential for increased supply from both Libya and Saudi Arabia. In Libya, rival administrations reached a compromise on appointing new leadership for the central bank, which could lead to a resumption of oil production. Libya's daily production has been halved since a dispute began in mid-August, falling from over 1 million barrels to below 0.5 million barrels.

Further fueling the decline, a Financial Times article reported that Saudi Arabia is ready to abandon its USD 100 per barrel oil price target and increase output. This represents a significant shift in strategy for the de facto leader of OPEC, who has led efforts to maintain stable and high prices since 2020.

"While stability was successfully achieved until recently, the higher price target has failed, not least due to a major slump in China's oil demand growth, down from around 1.3 million barrels a day in 2023 to less than 200,000 barrels a day in 2024," said Hansen.

Responding to the falling prices, the OPEC+ group of producers postponed until December plans to gradually roll back voluntary production cuts. This suggests a growing acceptance of lower oil prices, particularly given the slowing demand growth in China.

While the Financial Times report on Saudi Arabia's intentions may be denied, it is evident that Saudi Arabia is growing increasingly frustrated with cheating within OPEC+, Saxo Bank pointed out. They may be using this as a message to quota cheaters, including the UAE, that they are willing to increase production if cheating continues.