Oil market turns bearish as Libya deal reached; Brent plummets over 11% in just a week

International crude oil prices kept falling on Wednesday, September 4th, dropping by $1 a barrel, about two percent. This dip was fueled by concerns about demand, prompted by reports of a potential deal to resolve a dispute halting Libyan production and exports.

Brent crude futures saw an 88-cent drop, or 1.2 percent, to $72.87. US West Texas Intermediate crude futures fell 90 cents, or 1.28 percent, reaching $69.44. This downward trend caused Brent crude futures to plummet by 11 percent, approximately $9, within just over a week, hitting a multi-month low of $72.63 on Wednesday. In domestic markets, crude oil futures were trading 1.16 percent lower at ₹5,849 per barrel on the Multi Commodity Exchange (MCX).

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Oil crashes to multi-month low: What’s behind the bearish sentiment?

Both crude benchmarks initially experienced a $1 loss before rebounding on Wednesday with a $1 increase from Tuesday’s closing prices. This rebound followed news of the Organisation of Petroleum Exporting Countries (OPEC) contemplating delaying a potential output increase due to expected growth in Libyan production.

Weaker data from the US and China intensified concerns about a global economic slowdown and reduced oil demand, offsetting a broader decline in world markets. Additionally, the potential resolution of the Libyan oil export dispute could lead to an increase in crude supply.

This poses a challenge for OPEC, as they were previously planning to move forward with output hikes in October. However, due to market volatility, there are discussions about delaying these hikes.

Analysts suggest that if OPEC fails to assure an extension of current output cuts, the market may lose confidence in OPEC’s ability to maintain the $70/bbl level.

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Recent data releases have raised concerns about weaker-than-anticipated demand from China, the largest crude importer globally, and a decline in US consumption. Chinese data revealed a significant drop in manufacturing activity in August, along with slower growth in new home prices.

In the US, Institute for Supply Management data highlighted subdued manufacturing conditions. A preliminary Reuters poll suggested that US crude oil and gasoline stockpiles were likely to have decreased last week.

While there is a prevailing pessimism regarding demand, supply changes could quickly alter sentiment. Analysts believe a positive shift in sentiment could occur with a notable crude draw in the US.

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What lies ahead for oil prices?

On Tuesday, oil prices took a nearly four percent dive, eliminating all gains for the year. These losses were driven by concerns of weakening demand from China and an anticipated production increase from OPEC+ nations. West Texas Intermediate crude dropped by 3.7 percent, while Brent crude was down over 4.5 percent.

“Manufacturing in China hit a six-month low in August, and lower demand expectations are capping crude prices as China remains the world’s top crude oil importer,” noted Amit Goel, Co-Founder & Chief Global Strategist at Pace 360.

Goel also mentioned, “China’s economic restructuring will reduce its reliance on oil in the future, posing another challenge for the commodity. This restructuring involves a shift towards Electric Vehicles (EV) and a transition from oil to liquefied natural gas (LNG).”

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Anlayats further explained that international crude oil experienced a significant sell-off, with prices declining by nearly five percent following reports of potential resolutions in Libya that could lead to resumed oil production and exports.

“Crude oil prices are under pressure due to demand worries from China. Additionally, OPEC+ has announced a phased increase in oil production starting in October, which could further impact global crude oil prices. The dollar index remains stable ahead of crucial US economic data, limiting any upward movement in crude oil,” noted Rahul Kalantri, VP Commodities at Mehta Equities Ltd.

“Despite this, signs of revival in the European economy and ongoing geopolitical tensions are providing some backing to oil prices at lower levels. We expect crude oil prices to remain volatile, with support around $68.70-$68.00 and resistance at $70.10-$70.75. In Indian Rupees, crude oil is expected to find support at ₹5,845-₹5,780, with resistance at ₹6,000-₹6,080,” added Kalantri.