Brent oil sinks 4% to a 5-month low of $74 on bearish fundamentals

Brent and WTI crude oil hit fresh 5-month lows of $74/b and $69/b respectively on Wednesday, or down nearly -4%, amid growing concerns over fuel demand on the clouded outlook for China’s economic health, coupled with the oversupply conditions.

Brent crude oil, Daily chart

Energy traders have become net sellers on the crude contracts during the final quarter of the year, sending prices to their lowest levels since July on demand-supply differentials, despite the geopolitical risks and OPEC+ cuts.

The market has been more focused on the demand destruction coming from the weak global economy rather than the fears of a possible supply disruption from the Middle East tension or the recent OPEC+ output cuts.

In this context, the oil prices have fallen nearly 20% since the Hamas attack on Israel in early October, and about 10% since OPEC+ announced a combined 2.2 million barrels per day of voluntary output cuts for the first quarter of next year.

The falling oil prices reflect the concerns over lagging petroleum demand from China, as the world’s second-largest fuel consumer has shown signals of economic and trade slowdown in the last few months, while the rating agency Moody’s put a downgrade warning on China's sovereign credit rating.

Chinese customs data showed that crude oil imports in November fell 9% from a year earlier, as high inventory levels, weak economic indicators, and slowing orders from independent refiners weakened demand.

The unexpected record-high oil production from some non-OPEC countries such as the USA, Canada, and Guyana has also been weighing on crude prices. The U.S. average daily production in September topped 13.24 million barrels according to EIA https://oilprice.com/Energy/Crude-Oil/US-Record-Breaking-Oil-Output-One-More-Blow-to-OPEC.html, with Shale drillers leading in the output growth.

The selloff in crude oil prices came despite the decision by the OPEC+ group to place a 2.2 million barrel-a-day production cut through the first quarter of 2024, with the intent of boosting crude prices and smoothing out distortions in the oil market.

However, the decision of OPEC+ to extend production cuts and further reduce output from January did not satisfy market expectations, which expected the cartel to deliver more production cuts in 2024 to stop the speculation and volatility in the oil markets.