Tuesday, oil futures closed at their lowest level of the year. This was because bad economic news from China and the U.S. factory sector made people worry that energy demand would drop.
Tuesday’s sharp drop in oil prices was also caused by rumors about how to end a dispute in Libya over who controls the country’s central bank. This dispute had apparently caused major problems with oil production and exports from the country.
The price changes
- November Brent crude BRN00 -0.07% The world average price of oil, BRNX24 -0.07%, dropped $3.77, or 4.9%, to settle at $73.75 a barrel on ICE Futures Europe. Prices have dropped 4.3% this year, according to Dow Jones Market Data, making that the worst first month finish since December 12, 2023.
- In October, West Texas Intermediate crude CL00 fell by 4.53% and CL.1 fell by the same amount. On the New York Mercantile Exchange, crude oil prices dropped $3.21, or 4.4%, to settle at $70.34 a barrel. This was the lowest end to the first month since December 13, 2023. Prices have dropped 1.8% so far this year.
- Gasoline prices fell 5.5% to $1.9777 a gallon in October (RBV24 -5.47%), and heating oil prices fell 3.2% to $2.206 a gallon (HOV24 -3.16%). Both contracts ended at their lowest levels since December.
- In the end, the price of natural gas for October delivery NGV24 3.34% ended at $2.203 per million British thermal units, up 3.6% for the day.
Market forces
“Thoughts that the U.S. driving season would push prices to new all-time highs this summer did not come true because demand stayed low in key economic regions like China,” said Fawad Razaqzada, a market expert at City Index and FOREX.com.
OPEC+, which is made up of the Organization of the Petroleum Exporting Countries and its partners, however, seems “content with plans to increase output from the fourth quarter,” he said in report on the market.
“OPEC’s optimistic demand forecasts have not come true so far,” Razaqzada said. “China, which imports the most crude oil, is struggling for economic growth.” “Economies in Europe have also had a hard time, and growth in the US has slowed down a lot.”
In China, the Caixin purchasing managers’ index for the manufacturing sector rose from 49.8 in July to 50.4 in August. However, it was still the second-lowest number of the year, according to a note from economists at Pantheon Macroeconomics. In August, the official factory PMI fell from 49.4 in July to 40.1. It has now been below 50 for four months in a row.
According to Razaqzada, the oil market will not be as tight as people thought it would be a few months ago because new data shows that import demand has not risen in China, Europe, or North America. “The extra supply will have to be taken care of either by lowering oil production or a sudden acceleration in the recovery of the world economy.” Neither of these outcomes seems likely or likely to happen soon.
The Institute for Supply Management’s factory index for the U.S. rose from a low point of 46.8% to 47.2%, the highest level in eight months. The key indicator of U.S. factories was negative for the fifth month in a row, which means the industrial sector is shrinking.
Based on front-month contracts, WTI fell 5.6% in August, making it the second month in a row that it lost money. Brent also lost money back-to-back, 2.4%. On Monday, Brent went up 0.8% and WTI didn’t settle because of the U.S. Labor Day holiday.
The price drop for crude, on the other hand, was limited by a standoff in Libya between two groups fighting over who should run the country’s central bank. According to Reuters, the conflict has caused several Libyan ports to close and a sharp drop in production by OPEC members. Since the conflict started last month, production has been cut in half from what it normally is.
On Tuesday, though, rumors of a deal to end the feud made people less worried about the possibility of shortages around the world.
A Libyan central banker told Bloomberg that there were signs that the political groups involved were close to coming to an agreement, which meant that a deal to end the conflict in Libya was very likely to happen soon.
The oil cartel and its Russia-led partners make up OPEC+. Next month, some members of OPEC+ will start to reduce production cuts even more.
Achilleas Georgolopoulos, an investment expert at XM, said in a note that the trend for crude to go down since the peak near $84 for WTI in early July “remains in place as the OPEC+ alliance is getting ready for a production increase.”
The market thinks that OPEC+ will add an extra 180,000 barrels of oil a day starting in October, Georgolopoulos said. He was worried about a bigger rise in production limits, though, in part because of what was happening in Libya.
The analyst said, “Such an announcement could make the demand-supply balance even worse, especially since the Chinese data prints keep being disappointing.” “So far, the Chinese government’s efforts to get its economy going again have failed. This has lowered demand for oil and made it harder for oil prices to stay high.”
