The collapse is not over yet? Any rebound in the oil market may be temporary

The crude oil market is facing increasing downward pressure, and its price plunge indicates further softness in the future.

Analysts from the global economic analysis company BCA Research pointed out the factors leading to the recent oil price plunge in a report on Friday, suggesting that the worst period may not be over yet.

The company advises investors to reduce their exposure to crude oil, as market fundamentals indicate that oil prices will continue to fall in the next 6 to 9 months.

One of the main factors causing the decline in oil prices is the downward revision of global demand forecasts.

Major organizations including the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA), and OPEC have all lowered their forecasts for oil consumption in 2024 and 2025.

This marks a shift from earlier more optimistic forecasts in market sentiment. In addition, Wall Street banks such as Goldman Sachs, Morgan Stanley, and Citigroup have all lowered their Brent crude price targets.

Weak demand data below expectations support this pessimistic sentiment. In the first half of 2024, global oil consumption growth hit the lowest level since 2020, mainly due to reduced economic activity and declining demand in major consumer markets.

China reduced its crude oil imports by 8 batches, a 7% decrease compared to the same period last year, exacerbating concerns about global oil demand.

While demand weakens, supply-side dynamics are also playing a role in depressing oil prices. Production from non-OPEC oil-producing countries such as Brazil, Canada, and the United States has surged, enough to offset OPEC+'s production cuts.

These non-OPEC countries are increasing production by 1.5 million barrels per day, overshadowing OPEC+'s daily production cut of 1.2 million barrels.

As a result, the oil futures curve is flattening, indicating waning enthusiasm in the market for short-term contracts. The spread between spot contracts and forward contracts has narrowed, reflecting increasing concerns about oversupply in a scenario of continuously decreasing demand.

Although the outlook for oil prices remains bearish, a rebound is possible in the near term.

Fund managers have reduced their long positions in oil, with net long positions in Brent crude and WTI crude hitting historic lows. After net long positions drop to such low levels, it often triggers a rebound in oil prices.

However, BCA Research emphasizes that any potential rebound may be short-lived. "Even in the case of price increases, the average duration of a rebound of 23 days is relatively short," analysts said.

The lack of strong fundamental factors driving sustained demand growth further supports the view that any price recovery will be temporary.

From a cyclical perspective, the path of least resistance for oil prices remains downward. Historically, oil prices often weaken in the fourth quarter, characterized by a decline in demand after the summer driving season.

Refineries typically undergo maintenance during this period, leading to an increase in crude oil inventories and additional downward pressure on prices.

Moreover, the broader economic outlook is also unfavorable for crude oil. BCA Research strategists believe that the likelihood of an economic recession in the next 12 months is high. Therefore, "the global demand situation for oil may deteriorate further." Saudi Aramco's flagship official selling price (OSP) for crude oil to Asia has dropped to a nearly three-year low, signaling another negative outlook for demand.

BCA Research recommends that investors reduce their exposure to crude oil, especially in the next 6 to 9 months. The company emphasizes in its report the cyclical vulnerability of the oil market and the high likelihood of continued weakness in oil prices.

While a short-term rebound driven by technical factors is possible, it is expected to be short-lived. Once the rebound loses momentum, oil prices may return to a downward trajectory.

BCA Research also points out that the efforts of OPEC+ to stabilize the market have limited effectiveness. Even if the alliance extends production cuts, it may not be enough to prevent oversupply in the oil market by 2025. OPEC+ will need to implement more extensive production cuts, which could lead to internal disagreements and compliance issues.