Can OPEC+ Prevent Another Rout in Oil Prices?

The OPEC+ group may not have any options left to counter the extreme bearishness in oil markets by further restricting supply.

Bullish sentiment is likely to re-emerge if there is good news on the demand front.

For now, good news about oil demand looks a distant prospect, especially after the end of the peak summer driving season. Concerns about the Chinese economy and the country’s oil demand add to worries about slowing economic growth in the developed economies to depress markets. These concerns have prompted analysts and investment banks to lower their oil price forecasts for the end of the year.

OPEC Starts Trimming Demand Growth Forecasts

Following the recent slide in oil toward the low $70s per barrel, the OPEC+ alliance delayed the beginning of the unwinding of 2.2 million barrels per day (bpd) of cuts by two months until December 2024.

The decision did little to lift oil prices—the market was half expecting a delay, especially after OPEC cut in August its global oil demand growth view citing weakness in China.

In its monthly report for September, OPEC further trimmed its demand growth outlook and further weighed on oil prices and market sentiment.

In just two months, demand worries have flipped the bullish view of traders and speculators to the most bearish positioning in petroleum futures in recorded history since 2011.

Money managers seem to have concluded that OPEC+ can’t or won’t announce additional production cuts to prop up prices, energy analyst John Kemp writes in his blog.

Most Bearish Positioning Ever

Signs of weak demand and weakening refining margins have weighed on oil prices and market sentiment, prompting speculators and money managers to slash their bullish bet on oil futures to the lowest on record dating back to 2011.

In the week ended September 10, money managers held a net short position in Brent for the first time in recorded history, since 2011.

The net length—the difference between bullish and bearish bets—flipped to a net short in the reporting week to September 10, as speculators and traders remained concerned about lower-than-expected global oil demand growth. Weakness in Chinese economic indicators and falling refining margins exacerbated the bearish sentiment on oil in the first two weeks of September.

Moreover, persistent weakness across the refined fuel market helped drive an increase in the net short position in the European and U.S. diesel futures.

“Combining the five major crude and fuel contracts, the net long of these fell to the lowest level since 2011, when the ICE Exchange started to collect Brent and gas oil data,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote this week, commenting on the latest commitment of traders (COT) report.

Ripe for Rally?

Of course, the exceptionally bearish positioning in oil lays the foundations for a rally in which traders will look to cover their shorts. However, the market will need a flip in the narrative in demand for a rebound.

Right now, there aren’t signs that demand is accelerating while supply continues to be steady. If the three OPEC+ overproducers, Iraq, Russia, and Kazakhstan, stick to their compensation schedules, some supply would come off the market in the coming months.

But will this be enough to prevent an oversupply next year?

Many banks say no.

Weaker-than-expected demand is set to tip the oil market into a surplus over the next five quarters, Macquarie said last week as it lowered its Brent and WTI oil forecasts for the rest of the year.

“As we enter shoulder and turnaround season, the ‘last hurrah’ for oil in the form of Q3 tightness is quickly fading as our balances contemplate heavy oversupply across the next five quarters,” Macquarie analysts wrote in a note.

Just two weeks after lowering its Brent estimate to $80 per barrel for the fourth quarter, Morgan Stanley cut its forecast again, now expecting the international benchmark to average $75 a barrel in the last quarter of the year. Analysts at Morgan Stanley see rising headwinds on the demand side, which has been their key reason for cutting their Q4 oil price forecast.

Weaker Chinese oil demand, high inventories, and rising U.S. shale production have prompted Goldman Sachs to reduce its expected range for Brent oil prices by $5 to $70-$85 per barrel.

Citi expects oil at $60 per barrel in 2025 if OPEC+ doesn’t implement additional cuts to its production.

So far, the group has not signaled any intention to deepen the output cuts.

Analysts assume that OPEC+ will begin unwinding some of the current cuts early next year. Combined with rising non-OPEC+ supply, this will tip the market into oversupply for most of 2025, according to banks and analysts.

A rebound in demand would be most welcome by oil bulls, but as-is, no signs have emerged in recent weeks about positive demand figures. Refining margins are falling and leading to reduced refinery run rates in Asia and Europe.