Oil prices extended their downward trajectory on Monday, pressured by disappointing economic indicators from China and anticipation of increased production by OPEC+. Brent crude futures fell by 20 cents, or 0.3%, to $76.73 per barrel, while U.S. West Texas Intermediate (WTI) crude dipped 19 cents, or 0.3%, to $73.36. This decline follows significant losses last Friday, with Brent and WTI slipping 1.4% and 3.1%, respectively.
The recent dip in oil prices is largely attributed to two key factors: the expected rise in oil production from OPEC+ and weak economic data from major economies, particularly China. According to Chris Weston, head of research at Pepperstone, the market's momentum appears to be skewed towards further declines, suggesting a potential revisit to multi-month lows.
OPEC+, which includes major oil producers such as Saudi Arabia and Russia, is set to increase its oil output starting in October. Sources within the organization revealed that eight of its members are scheduled to raise production by 180,000 barrels per day (bpd) as part of a broader plan to unwind recent supply cuts while maintaining other reductions through the end of 2025.
The planned production increase comes amidst concerns that the global economy might be slowing down, with China's economic performance in particular falling short of expectations. Achilleas Georgolopoulos, an investment analyst at brokerage XM, noted, "These stronger production increases could come at a period when the global economy is probably slowing down, with China continuing to disappoint."
Adding to the bearish sentiment, data from China revealed a significant slowdown in manufacturing activity. The official Purchasing Managers' Index (PMI) for August dropped to 49.1, marking a six-month low and reflecting the fourth consecutive month of contraction in the sector. This data heightens fears that the Chinese economy may struggle to meet its growth targets, according to Tony Sycamore, an analyst at IG Markets.
In the U.S., oil consumption has also shown signs of weakness. Energy Information Administration (EIA) data from Friday indicated that U.S. oil consumption in June had fallen to levels last seen during the COVID-19 pandemic in 2020. This decline in demand adds to the uncertainty surrounding the oil market and further pressures prices.
Despite the gloomy demand outlook, supply disruptions in Libya have added another layer of complexity to the oil market. Libya's oil exports have been halted due to political tensions, although the Arabian Gulf Oil Company has managed to resume production at up to 120,000 bpd to meet domestic needs. Analysts are divided on whether this resumption signals progress in Libya's internal negotiations or is merely an effort to address local demand, ING's Warren Patterson and Ewa Manthey noted.
The market remains cautious as OPEC+ continues its planned output increases while facing a backdrop of tepid demand. ING analysts suggested that despite the potential for further supply disruptions, the group is inclined to proceed with the gradual unwinding of cuts from October. They also highlighted that speculative positioning in the oil market remains relatively restrained due to ongoing uncertainty over both demand and OPEC+ policy.
On the production side, the number of oil rigs in the U.S. has remained unchanged at 483 for the week ending August 30, according to Baker Hughes data. This stability in rig counts, coupled with a year-over-year decline of 29 rigs, reflects a cautious approach to short-term production adjustments.
