Oil Demonstrates Its Weakness

Brent crude prices are down by 3.8% this week to $71.90 per barrel, dipping as low as $70.89 earlier on Thursday, marking the lowest level since September 12 and nearing the September 10 lows when concerns over a U.S. recession were high.

This time, negative sentiment is even stronger, with declining PMIs (Purchasing Managers' Indexes) for both manufacturing and services in the Eurozone, U.S., and the U.K. Japan is also experiencing falling manufacturing activity, while its services sector stagnates. Despite this, the oil supply outlook appears more optimistic as U.S. oil inventories dropped by 4.47 million barrels last week.

However, prices continue to fall due to concerns over increasing oil supply. Traders expect a possible rise of 900,000 barrels per day from Libya after a compromise on leadership for the central bank between rival Libyan administrations, potentially allowing a return of crude production. Additionally, Saudi Arabia may be abandoning its informal target of $90.00-$100.00 per barrel in favour of increasing production. While there has been no official confirmation, these concerns are weighing heavily on the market, overshadowing geopolitical tensions in the Middle East, where Israel is preparing for a potential ground operation in Lebanon. Some believe a ceasefire could lead to a resolution.

The United States Oil Fund (USO) reported net outflows of $189.6 million last week. A week earlier, the Fund had reported inflows of $327.4 million when Brent crude was trading at $74.00 per barrel, signalling that large investors have been partially closing long positions without a profit.

The Federal Reserve’s recent half-point rate cut has heightened fears of a rapidly cooling U.S. economy, though Chairman Jerome Powell has sought to calm these concerns. China’s announcement of a significant stimulus package this week is similarly viewed as an attempt to stave off economic worries.

Despite these fears, panic sell-offs may be unwarranted. Large investors are keeping long positions open as crude prices remain near key support levels. If Brent crude prices hold steady, the market may see another upward push. Conversely, if prices drop below $70.00 per barrel, it may signal the need to close long positions and brace for a potential 13% decline to $60.00 per barrel.