Oil Prices Struggle: OPEC+ Output Increase and Weak Demand Push Brent Below $72

OPEC+ Supply Strategy and Its Impact on Crude Oil Prices

The global oil market has been rattled by the potential increase in supply as OPEC+ remains committed to its output plans. The market's sensitivity to additional barrels has painted a bleak short-term outlook for oil prices. Currently, Brent Crude trades at around $71 per barrel, while West Texas Intermediate (WTI) hovers near $68 per barrel. These price levels reflect a more than 4% drop this week alone, with the monthly decline nearing 10%, a stark indication of concerns surrounding a potential oversupply and reduced demand.

As a response, money managers have turned bearish, with short positions on Brent futures surpassing longs for the first time on record. The bearish sentiment is exacerbated by fears that OPEC+ will begin unwinding the 2.2 million barrels per day (bpd) of voluntary cuts starting in December 2024. The plan, which initially aimed to restore halted supplies by October, was delayed due to a steep decline in prices in September. If these cuts are phased out, the market could face a glut, especially considering that OPEC+ intends to bring back 180,000 bpd each month through November 2025.

This situation is further complicated by Saudi Arabia’s rumored readiness to abandon its $100 per barrel price target. The world’s largest crude exporter has reportedly begun preparing to increase production, which sent oil prices tumbling by over 3%. This move signals that Saudi Arabia is less focused on sustaining high prices and more on regaining market share, echoing the mid-2010s strategy when OPEC flooded the market, driving oil prices down to $30 per barrel.

Demand Concerns in the Global Oil Market

The outlook for demand is equally concerning, with global economic conditions failing to live up to expectations. In particular, China, the world's largest crude importer, has not experienced the rebound in demand many had hoped for, despite recent economic stimulus measures. The U.S., another critical market, is also witnessing muted demand growth. Together, these two nations significantly influence global oil consumption, and their underperformance is adding pressure to already fragile market conditions.

Analysts are increasingly forecasting a market surplus in 2025. ANZ Research predicts Brent will fall to $65 per barrel in December, before recovering to $80-$82 per barrel in the latter half of next year. However, this optimistic recovery is contingent upon OPEC refraining from an aggressive production increase that could trigger a price war. FxPro’s Alex Kuptsikevich has echoed this sentiment, pointing to technical support for Brent at $70 per barrel but warning of a potential plunge to $30 per barrel if OPEC+ abandons market stabilization efforts entirely.

The bearish forecast is further reinforced by BMI analysts, who have retained their $81 per barrel forecast for Brent in 2024 but concede that risks remain skewed to the downside. Meanwhile, Bernstein projects that if OPEC+ releases the 2.2 million bpd into the market as planned, Brent could drop as low as $55 per barrel, averaging $60 per barrel in 2025.

The Flattening of the Oil Futures Curve and Its Implications

The oil futures curve, which measures the price difference between near-term and longer-term contracts, has flattened dramatically in recent months. Brent’s bullish structure, which saw near-term contracts trading at a premium, has all but disappeared. A year ago, this premium was more than $20 per barrel. Today, the nearest contract is only trading a few cents higher than contracts for 2031.

This flattening of the curve is partly driven by expectations of a surplus in 2024 but is also being influenced by shifts in trading dynamics. Speculators, particularly algorithm-driven traders, have taken historically bearish positions. Data from ICE shows that money managers now hold the fewest net-long positions in crude oil and refined products since 2011.

However, there are signs that major oil consumers, such as airlines, are taking advantage of lower prices to lock in long-term contracts. Trading volumes for June 2025 Brent contracts have surged, as businesses seek to hedge against potential price increases in the future. This buying activity helps slow the decline in longer-dated oil prices and further flattens the futures curve.

A flatter curve impacts both short-term trading strategies and long-term capital investment decisions in the oil industry. For traders, it means less incentive to store oil in the hopes of selling at higher future prices, which could lead to an increase in available supply in the spot market. For oil companies, it complicates project planning, as the lower long-term price outlook might reduce the attractiveness of capital-intensive exploration and production efforts.

Geopolitical Risks and the Impact on Crude Prices

While market fundamentals point to a bearish outlook, geopolitical risks continue to provide support to crude prices in the short term. The escalating conflict in the Middle East, particularly between Iran-backed Hezbollah and Israel, has created fears of supply disruptions. Historically, unrest in the region tends to drive prices higher, especially as the risk of broader conflict looms.

Additionally, the potential for extreme weather to disrupt oil production, particularly in the U.S. Gulf of Mexico, adds another layer of uncertainty. Despite these risks, analysts warn that these factors are unlikely to lead to sustained price increases unless there is a significant escalation.

Outlook and Trading Strategies

Looking ahead, the market remains cautious. While ANZ and BMI maintain relatively optimistic medium-term forecasts, the overall sentiment is bearish, with most analysts expecting lower prices in 2024 before a potential recovery. The critical factor will be OPEC+’s ability to manage production increases without overwhelming the market.

Traders are advised to watch for signals from the OPEC+ Joint Ministerial Monitoring Committee (JMMC), which meets next week. Though the committee does not have decision-making power, its recommendations could influence the production strategy that will be finalized at the December ministerial meeting. Any signs of a shift toward more aggressive output increases will likely trigger further price declines.

On the trading front, some strategists are eyeing a potential bounce led by Commodity Trading Advisors (CTAs). These funds follow trends and often amplify price swings, making them a key driver of short-term volatility. Should equities rally or geopolitical risks intensify, CTAs could push oil prices higher, providing a short-term trading opportunity.

Conclusion

The oil market is currently at a critical juncture, with prices under pressure from both supply and demand concerns. Brent Crude and WTI are hovering near yearly lows, reflecting fears of an oversupplied market in 2025. While geopolitical risks provide some support, the long-term outlook is heavily dependent on OPEC+’s ability to manage production levels and avoid a repeat of the 2010s price collapse. Investors and traders will need to keep a close watch on OPEC+ meetings and demand indicators from major consumers like China and the U.S. as they navigate these turbulent market conditions.

That's TradingNEWS