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Since July of this year, the
oil market has struggled to regain momentum. It has even reached a point
where the price of WTI crude oil fell below $68, a level we have not seen since
March 2023.
Meanwhile, the S&P 500, Dow Jones, and XAUUSD have all
experienced a remarkable upward surge.
It didn’t even help that OPEC+ members delayed the return of
some new barrels to the market by two months in early September. The cartel
most likely expected a rebound, but it didn’t happen.
There are several reasons for gloomy sentiment these past
few months. Firstly, countries have consistently missed their production
targets, exceeding agreed levels, and thus pushing prices downwards.
For example, in August 2024, production reached 34.56
million barrels, 850,000 barrels per day above the target. Weak signals on
supply control have naturally hurt fossil fuel prices.
Second, as the IEA points out, the increase in oil demand
during the first half of 2024 was the lowest since the pandemic year of 2020.
Consumption declined not only in developed countries but also in China.
Finally, news on the deteriorating labor market, especially
after the U.S.
economy created 818,000 fewer jobs than initially reported in the 12 months
through March 2024.
For the record, we are talking about the largest downward
revision since 2009. As a result, fears of a hard landing are growing, which
triggered a drop in risk assets and oil.
What about the recent moves? Are they trend reversals?
We first need to understand where this unexpected optimism
comes from to answer that. It is not a single factor but a combination of
several that has improved the market’s mood.
First, some reasonably positive economic data from the
United States, indicating that the economy appears to be holding up well and
that a recession could be avoided, helped to support oil prices.
Then, the Fed’s unexpected decision to lower
rates by 50 basis points instead of the 25 analysts had expected raised
hopes that demand for black gold could increase. But again, that is more
theoretical.
Escalating geopolitical tensions, especially in the Middle
East, have also played a role. If the conflict between Israel and Hezbollah
escalates, supply chains could be disrupted.
Finally, Beijing has emerged from its lethargy and initiated
the active stimulus measures that many expected. These measures have pushed up
prices in commodity markets, including oil and industrial metals.