Oil Prices Forecast: Contango Structure Marks Fourth Week of Losses

Highlights

• Oil prices stable early Friday, but losses continue for fourth week.
• U.S., Asia data fuel global oil demand worries.
• Market shift to contango indicates ample supply.

Oil Market Overview

Oil prices remained stable on Friday, marking a consistent trend of minimal change, but are set for a fourth consecutive week of losses. This stability comes after a significant 5% decline on Thursday, driven by global demand concerns. Data from the U.S. and Asia has contributed to these worries, leading investors to question the future demand for oil globally.

Market Trends and Price Movements

Early Thursday, Brent futures are experiencing a modest rise, climbing 4 cents to $77.46 per barrel. In a similar vein, U.S. West Texas Intermediate (WTI) crude is edging up by 5 cents, settling at $72.95.

However, these slight increases do little to offset the significant losses both benchmarks have incurred over the past month, with each losing approximately one-sixth of their value.

Reflecting current market conditions, the shift to a contango structure is evident, where near-term prices are lower than those in future months, suggesting a market that is well-supplied.

Factors Influencing the Market

The decline in oil prices this week is largely attributed to a notable increase in U.S. crude inventories and sustained high production levels. These factors have raised alarms about potential demand weaknesses in the U.S., the world’s largest oil consumer. Analysts have noted a negative sentiment in the market, with technical charts reflecting this outlook. Until a significant change occurs, this downward trend may persist.

Global Supply and Demand Outlook

OPEC and the International Energy Agency (IEA) anticipate supply tightness in the upcoming fourth quarter. However, recent U.S. data suggests otherwise, with abundant inventories reported. Additionally, a slowdown in Chinese oil refinery throughput and weakening industrial fuel demand have contributed to investor concerns. Despite this, Chinese economic activity showed signs of recovery in October with increased industrial output and retail sales.

Short-Term Forecast

Looking ahead, the market is expected to return to a surplus in the first quarter of 2024. Saudi Arabia’s potential extension of its voluntary oil output cut into 2024 could help offset this surplus. ING analysts believe that the oil balance for the remainder of the year may not be as tight as initially expected, leading to a surplus. However, additional supply cuts by Saudi Arabia could provide necessary market support and prevent an oversupply situation.

Technical Analysis

The light crude oil futures market, with a current daily price of $73.18, is positioned below the 50-day moving average of $84.78, indicating a bearish trend in the short term. It’s also below the 200-day moving average of $78.11, reinforcing this bearish sentiment.

The price hovers above the minor support level of $72.48 and is significantly above the main support at $66.85, suggesting that there might be some level of buying interest preventing a further drop.

The proximity to the minor resistance at $77.43 could indicate potential challenges in upward price movements.

Considering these technical indicators, the market sentiment leans towards bearish, with room for fluctuations near the minor support and resistance levels.