After two consecutive weeks of gains, oil prices have fallen back into bear territory this week, as fears about higher supply from Libya and Saudi Arabia outweighed positive signals from China.

Earlier this week, Saudi Arabia reportedly decided to ramp up its oil production starting in December, abandoning its earlier target of maintaining a $100-per-barrel oil price.

This, along with the possibility of higher supply from Libya—where a political dispute was resolved on Thursday—could pave the way for the return of around 500,000 barrels per day of oil from the Middle Eastern country.

Global oil prices slipped following news of the Kingdom considering increased production from December.

At the time of writing, Brent crude oil on the Intercontinental Exchange was at $70.64 per barrel, down from last week’s close of $74.49 per barrel. Since Monday, prices have fallen 5%.

As for West Texas Intermediate (WTI) crude oil, prices have dipped 4% since Monday and are currently around $67.48 per barrel.

On Friday, China’s central bank cut interest rates and provided much-needed liquidity to the banking system.

However, the positive move failed to prop up the mood in oil markets, with traders focusing on the prospect of rising supply.

Though more economic stimulus is expected from China, the world’s largest crude oil importer, next week, the growing prospect of rising supply is likely to continue weighing on prices.

“When we boil everything down, the market faces the stark reality of demand leveling off and supply growing,” Matt Stanley, head of market engagement, EMEA & APAC at Kpler, said in a commentary.

OPEC’s Voluntary Cuts Unwinding to Increase Supply

The Organization of the Petroleum Exporting Countries (OPEC) and its allies have been cutting crude production by 5.86 million barrels per day since last year to keep oil prices at desired levels.

However, barring a brief period in April when Brent prices touched this year’s high of $92 per barrel, the oil market has not been able to sustain those gains.

Weak demand from China and concerns over more oil hitting the market toward the end of the year have complicated matters for OPEC and its allies.

In June, OPEC agreed to start unwinding its 2.2 million barrels per day of voluntary output cuts from October.

However, sliding oil prices prompted the cartel to postpone the unwinding by two more months earlier this month.

The voluntary cuts are borne by only a handful of countries within the cartel.

Saudi Arabia, the de facto leader of the group, has been withholding 1 million barrels per day of oil from the market since late last year, over and above the quota agreed in the Declaration of Cooperation.

If Saudi Arabia and other members agree to unwind some of the voluntary production cuts from December, the oil market could face a substantial surplus.

According to the International Energy Agency (IEA), non-OPEC oil production is expected to rise by 1.5 million barrels per day in 2024 and 2025.

In contrast, OPEC and its allies’ oil output is set to decline by 810,000 barrels per day this year and rise by only 540,000 barrels per day in 2025, the Paris-based energy watchdog said in its September report.

The IEA said:

 

With non-OPEC+ supply rising faster than overall demand—barring a prolonged stand-off in Libya—OPEC+ may be staring at a substantial surplus, even if its extra curbs were to remain in place.

Poor Demand to Keep Prices Muted

At a time when oil supply is on the rise, global demand is headed in the opposite direction.

Demand for oil rose by just 800,000 barrels per day during the first half of 2024, according to the IEA, which is sharply lower than the growth of 2.3 million barrels per day in 2023.

For the year as a whole, growth in demand is likely to be 900,000 barrels per day in 2024.

“The rapid decline in global oil demand growth in recent months, led by China, has fueled a sharp sell-off in oil markets,” the IEA noted in its report.

Brent crude oil futures have plunged from a high of more than $82 per barrel in early August to a near three-year low of around $71 per barrel, despite hefty supply losses in Libya and continued crude oil inventory draws.

In China, the largest crude importer, demand in 2024 is slated to increase by just 180,000 barrels per day, as the broad-based economic slowdown and an accelerating shift away from oil in favor of alternative fuels weigh on consumption, according to the IEA.

The latest fiscal measures announced by Beijing could provide some support to oil prices, but all eyes will be on the country’s oil imports in the coming months.

At present, the oil market looks increasingly bearish.

“Traders should expect continued downward pressure on crude oil futures unless significant shifts in supply or demand materialize,” James Hyerczyk, an analyst at FXEmpire, said in a report.

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