Oil prices have retreated, paring back weekly gains, as sliding equity markets in Europe and Asia have compounded growing concerns about global demand. Brent crude futures dipped by 0.4% in London, reducing the week's advance to 3.5%. The outlook for crude oil has darkened following the International Energy Agency's (IEA) revised forecasts, which indicate a slowdown in consumption growth this year and warn of a potential long-term surplus.
China's oil processing boom, which has persisted for decades, faces a potential decline for the first time, barring the COVID-hit year of 2022, according to market watchers surveyed by Bloomberg. Additionally, sentiment cooled as Federal Reserve officials penciled in only one interest-rate cut for the year. Barbara Lambrecht, an analyst at Commerzbank AG, commented, "In view of the still uncertain economic outlook for the major economic regions, a further price increase is not to be expected for the time being."
European stocks are poised to close their worst week since January, driven by political turmoil in France. Meanwhile, in Asia, MSCI's Asia Pacific index slipped due to losses in Australian and Chinese stocks, which offset gains in Japan's benchmark. This decline in equity markets has exerted additional downward pressure on crude prices.
Crude prices have fallen 11% from a peak reached in mid-April. The drop is attributed to concerns over China's economic outlook and an anticipated surge in oil supplies from the US and other parts of the Americas. Although the market briefly wobbled after the OPEC+ alliance outlined plans to gradually restore halted output in the fourth quarter, it stabilized after the group indicated that it might reconsider.
Despite these fluctuations, timespreads remain in a bullish, backwardated structure, where later-dated contracts trade at a discount to nearer ones, indicating tight supplies. The gap between Brent's two nearest contracts stood at 40 cents a barrel in backwardation, compared with 28 cents a week ago.
On the other hand, oil prices showed stability on Friday, setting the stage for their best week in over two months, supported by solid projections for crude oil and fuel demand. Brent crude futures fell 19 cents to $82.56 a barrel, while West Texas Intermediate (WTI) U.S. crude futures dropped 32 cents to $78.30. Despite these slight declines, Brent and the U.S. benchmark had gained nearly 4% over the week.
The Organization of Petroleum Exporting Countries (OPEC) bolstered market sentiment this week by maintaining a forecast for strong growth in global oil demand for 2024. Additionally, Goldman Sachs projected robust U.S. fuel demand this summer, contributing to price support.
However, the rally in prices cooled after the U.S. Federal Reserve decided to keep interest rates on hold, with the start of rate cuts unlikely before December. "In view of the still uncertain economic outlook for the major economic regions, a further price increase is not to be expected for the time being," reiterated Commerzbank's Barbara Lambrecht.
Elsewhere, Russia pledged to meet its output obligations under the OPEC+ pact after admitting it exceeded its quota in May. "No matter how many times it promises to make up for poor compliance at a future date, the market just sees more oil and an agreement that might just possibly unravel," said PVM analyst John Evans.
Market attention has also shifted to ceasefire talks in Gaza, which could alleviate concerns about potential disruptions to oil supply from the region. A senior U.S. official expressed worry that hostilities on the Israel-Lebanon border could escalate, stressing that specific security arrangements are necessary for the area and that a ceasefire in Gaza alone would not suffice.
