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Oil prices are likely to head south in the coming months despite the ongoing Israel-Hamas war, as demand is stagnating and there is no “meaningful” supply tightness in the markets, according to a new analysis from Julius Baer.
On Tuesday this week, oil prices dropped to their lowest level since over three months ago on the back of rising OPEC exports and strengthening US dollar, with Brent crude futures trading below $84 per barrel for the first time since the start of the Middle East conflict.
“The market seems to be shifting its focus from fear-driven geopolitics to hard-fact fundamentals… and despite the Israel-Hamas war ravaging, oil prices are back below the pre-conflict levels,” said Norbert Rücker, Head Economics and Next Generation Research at Julius Baer, in a note.
Rücker noted that there are indeed ample supplies, and that demand is not surging.
“While prices seem less lofty following the correction, the headwinds should persist. We see prices heading lower over the coming months.,” Rücker said, adding that the uncertainty caused by the Israel-Hamas war since early October has now dissipated.
As far as supply is concerned, Rücker said the Western and Asian markets have “sufficient” levels of storage.
Production is also picking up while consumption in key markets is “stagnating”. Chinese demand, which strengthened over the summer months, has now cooled off, with imports remaining below their peaks and domestic refining easing amidst softening margins.
Russia’s oil exports and Canada’s oil production have also been “robust”, while Saudi Arabia’s output cuts are not a “sustainable equilibrium”.
“Given the full employment and confident consumer spending this year, there is little room for oil demand to expand in the western world,” noted Rücker.
“Oil politics could soon see a reset, as key Middle East producers aim for a higher output next year, seeking to cash in on capacity expansions.”
Saudi Arabia and Russia will continue with their production cuts of one million barrels per day until year-end.
(Reporting by Cleofe Maceda; editing by Seban Scaria)
