Oil trades bearish after Libya deal resolution fuels demand fears; At $72/bbl, Brent crashes over 11% in one week

International crude oil prices continued their bearish trend and fell by $1 a barrel or around two per cent on Wednesday, September 4, dragged by pessimism about demand fears after after reports emerged that a deal was in the offing to resolve a dispute that has halted Libyan production and exports.

Brent crude futures were last down 88 cents, or 1.2 per cent, to $72.87. US West Texas Intermediate crude futures were down 90 cents, or 1.28 per cent, at $69.44. The broader sell-off has seen prices for Brent crude futures fall as much as 11 per cent, or about $9, in a little over a week, hitting a multi-month low of $72.63 on Wednesday. Back home, crude oil futures traded 1.16 per cent lower at ₹5,849 per barrel on the multi commodity exchange (MCX).

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Oil crashes to multi-month low: What's behind the bearish sentiment?

-Both crude benchmarks had earlier lost $1 and then bounced back on Wednesday to gain $1 from Tuesday's closes, following news that the Organisation of Petroleum Exporting Countries (OPEC) was discussing delaying a possible output increase because Libyan production is expected to rise.

-Week data from the US and China strengthened persistent expectations of a weaker global economy and oil demand, helping offset a broader decline in world markets. Meanwhile, traders believed an end to a dispute halting Libyan oil exports could bring more crude supply back online.

-That posed a challenge for OPEC, which last week looked set to proceed with planned output hikes in October. The oil production group is now concerned about the market volatility and a delay to the hikes is being discussed.

-Analysts said if OPEC does not provide reassurance that current output cuts would be extended more indefinitely, then the market could lose faith in OPEC cartel defending the $70/bbl level. 

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-Recent data releases fuelled wider concerns around weaker-than-expected demand from China, the world's biggest crude importer, and U.S. consumption taking a hit. Chinese data on Saturday showed manufacturing activity sank to a six-month low in August when growth in new home prices slowed.

-Meanwhile in the US, Institute for Supply Management data showed manufacturing remained subdued. US crude oil and gasoline stockpiles were expected to have fallen last week, a preliminary Reuters poll showed. 

-While traders were pessimistic about demand fears, changes in supply could easily change sentiments. Analysts said the sentiment could very easily turn positive over a pretty decent crude draw in the US.

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Where are oil prices headed?

Oil dropped to nearly four per cent on Tuesday, erasing all its gains for the year. Driving the losses were concerns about weakening demand from China and a production increase from OPEC+ nations. West Texas Intermediate crude, the U.S. standard, was off 3.7 per cent; Brent crude, the international benchmark, was down more than 4.5 per cent.

‘’Manufacturing in China fell to a six-month low in August and Softer-than-expected demand are enforcing an upper limit on the price of crude as China is the world’s largest importer of crude oil,'' said Amit Goel, Co-Founder & Chief Global Strategist, Pace 360.

‘’China’s economy is undergoing a structural shift which will make it less dependent on oil in the future, a further headwind for oil. These structural changes in the economy include fuel-switching to Electric Vehicles (EV) and from oil to liquified natural gas (LNG),'' said Goel.

Also Read: Oil crashes 5% to hit nine-month low on reports of Libya dispute resolution; Brent slips below $74, erases 2024 gains

Anlayats added that crude oil experienced a significant sell-off, with prices dropping nearly five per cent in international markets following reports of a possible resolution to disputes in Libya, which could lead to the resumption of oil production and exports. 

‘’The crude oil prices are under pressure due to demand concerns from China. OPEC+ has also announced a phased increase in oil production starting in October, which could further weigh on global crude oil prices. The dollar index remains steady ahead of key US economic data, limiting any gains in crude oil,'' said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.

‘’However, signs of recovery in the European economy and ongoing geopolitical tensions are providing some support to oil prices at lower levels. We anticipate that crude oil prices will remain volatile. Crude oil has support at $68.70-$68.00 and resistance at $70.10-$70.75. In INR, crude oil has support at ₹5,845- ₹5,780, with resistance at ₹6,000- ₹6,080,'' said Kalantri.