After oil’s tumble, where will prices settle?

Good morning and welcome back to Energy Source, coming to you from New York. 

Thousands of fossil fuel executives and world leaders are gathering in Houston, Texas, this morning as Gastech, the gas industry’s largest trade fair, kicks off in the US energy capital. 

Gastech, which travels to different cities every year, returns to the US where gas production sits at record highs, prices remain low and the country has become the top exporter of liquefied natural gas. 

One theme to watch at this year’s conference is how executives are navigating regulatory uncertainty in the world’s largest gas-producing country. We have seven weeks left in the presidential election campaign, where Donald Trump has repeatedly attacked Kamala Harris for pivoting on her position to ban fracking, and project approvals for new LNG terminals remain up in the air. The Biden administration froze permits for new terminals in January, but that was later struck down by a federal judge.

Canada and Mexico, meanwhile, are reaping tens of billions of dollars in investment as they target the Asian market while US project expansions have slowed.

In today’s newsletter, the FT’s energy correspondent Lukanyo Mnyanda breaks down last week’s wipeout in oil prices and the dilemma confronting Opec.

Thanks for reading,

Amanda 

After last week’s tumble, where will oil prices settle?

It has been a curious period for people watching oil markets this year.

Despite months of geopolitical tensions in the Middle East and growing signs of slowing demand from China, oil prices barely budged from their relatively tight ranges. And then in the space of a week, months’ worth of excitement seemed to happen as the price fell to levels not seen in almost three years.

When the break from recent ranges came, it was faster and sharper than many had expected, prompting a flurry of forecast changes from analysts who had spent most of the year confident that prices would hold somewhere around $85 per barrel.

Instead it slumped below $70 for the first time since December 2021 before recovering slightly as a storm halted production in the Gulf of Mexico. That did not last and bearish bets by hedge funds signal that the price is more likely to head towards $60/b than $80/b.

The move in prices was “both quicker and sharper” than anticipated, Morgan Stanley chief commodities strategist Martijn Rats and colleagues wrote as they slightly downgraded their fourth-quarter forecast for Brent crude by $5 to $75/b. Morgan Stanley’s forecast, which the bank expects to hold for next year, was supported by other analysts.

But that information is only useful to a certain extent in a market that is still bound to be characterised by volatility that can catch many traders on the wrong side of market moving events, whether it is economic data or geopolitical developments.

Bjarne Schieldrop, chief commodities analyst at SEB, also believes an average of $75/b for next year would be a fair value for crude but cautioned that historical trends indicated the price typically moved about $15 either side of its average. 

That means crude could fall to $60/b or strengthen to $90/b at any point, depending on the headlines. Nitesh Shah, head of commodities at ETF provider WisdomTree, said what was more important was where the price would eventually settle between those wide ranges.

Weak economic data in China and the fact that interest rate markets are increasingly pricing in huge rate cuts by the US Federal Reserve would support the thesis that the direction of travel will be lower because of weakening demand.

But if the Fed manages to engineer a soft landing in the economy, or if there is a major disruption to production, oil bears could be in for some pain.

Opec’s dilemma

In the midst of that volatility, Opec and the International Energy Agency released their monthly oil reports that, not surprisingly, contained conflicting messages on the outlook for consumption. The producers’ cartel downgraded its forecast for oil demand growth this year only slightly to 2mn barrels per day, more than double the IEA’s prediction.

With trading signalling that investors are more inclined to be bearish on the price, Fatih Birol, the head of the IEA, might feel vindicated after the organisation had taken sustained criticism for its gloomy views.

For Opec, the past week’s events seem to have done little to resolve the dilemma of what to do with its spare capacity. The decision of the expanded Opec+ group to delay a plan to increase oil supply by at least two months failed to support prices in any meaningful way.

That has reinforced questions about whether it will ever be able to bring back those barrels in the face of muted growth globally and a structural weakening in China’s appetite for oil due to demographic changes and adoption of cleaner energy sources. But longer term, it may still be a mistake to write off Opec’s ability to “balance” the market. 

Some analysts, including David Allen at Octane Investments, believe that demand from emerging markets will increase oil consumption for years to come while the extra supply from US producers will eventually be exhausted, handing the initiative back to Opec. They also argue that the jury is still out on the ability of renewable sources of energy to replace hydrocarbons.

Allen expects Brent to strengthen to $105/b over the next “several years”. But for now, policymakers and consumers will be happy with the lower prices while they last. (Lukanyo Mnyanda)

Power Points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.