On September 9th, the energy sector in Hong Kong and A-shares plummeted.

In terms of Hong Kong stocks, oil stocks saw the most significant declines. As of the time of writing, China Oil and Gas Holdings fell by more than 8%, while China Petroleum and Chemical Corporation and China Offshore Oilfield Services both fell by over 6%, with China National Offshore Oil Corporation and Sinopec falling in tandem.

On the A-shares side, the oil and gas exploration and service sector also declined. Stocks such as China National Offshore Oil Corporation, China Oilfield Services, China Oil Engineering, and Junan Petroleum all experienced downturns.

Last Friday, international crude oil futures settled with a drop of over 2%, with both WTI and Brent hitting new lows since June 2023. WTI crude oil futures fell by 7.33% for the week. Brent crude oil futures fell by 7.03% for the week.

Advertisement

Since July, international oil prices have continued to decline. From July 5th to the present, WTI crude oil futures prices have fallen by more than 18%. Brent crude oil futures prices have fallen by more than 17%.

Weak demand prospects and rising supply expectations

Currently, there are two main reasons for the persistent decline in oil prices.

One is the emergence of recession signals in major developed economies, with a slowdown in global oil consumption demand growth, intensifying market concerns. Last week's released U.S. employment data and manufacturing PMI data were both weaker than expected, considered signals of a U.S. economic recession.

On September 3rd, the Institute for Supply Management (ISM) released data showing that the U.S. manufacturing PMI for August was 47.2%, an increase from July's 46.8%, but still below the 50% threshold, marking the fifth consecutive month that the U.S. manufacturing sector has been in contraction.

Furthermore, the non-farm employment data released on the 6th further intensified investors' concerns. The data showed that non-farm employment increased by 142,000 people in August, significantly below the market expectation of 165,000, but the unemployment rate dropped to 4.2%, indicating a continued cooling of the labor market.It is noteworthy that a report released by the International Energy Agency (IEA) in August predicted that the growth rate of global oil demand will slow down in the current and next years. The report indicated that the global oil demand growth rate will reach 970,000 barrels per day in 2024, consistent with the previous month; at the same time, the IEA has revised down its oil demand growth forecast for 2025 from the previous 980,000 barrels per day to 950,000 barrels per day.

Another factor is the potential easing of the political situation in Libya, with its crude oil supply expected to recover, which raises the expectation of supply.

Last Tuesday, the Governor of the Central Bank of Libya, Sadiq Al-Kabir, stated that there are "strong" indications that various political factions are close to reaching an agreement to break the current deadlock. The easing of relations between rival governments in Libya will pave the way for more than 500,000 barrels of oil production per day to return to the global market.

Will the decline continue in the future?

In order to save the continuous decline of oil prices, OPEC issued a statement on September 5th, deciding to delay the increase in production. Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman, eight "OPEC+" member countries, decided to extend the voluntary production cut of 2.2 million barrels per day, which was originally due to expire at the end of this month, until the end of November, and then gradually withdraw this part of the production cut according to market conditions.

Despite OPEC's strong willingness to support prices, market confidence remains insufficient.

Analyst Grant Smith said that OPEC+ decided to delay the production increase plan, but this temporary measure cannot prevent a supply glut in the global market in 2025.

The International Energy Agency (IEA) said that even if OPEC+ continues to restrict production throughout 2025, there will still be a surplus in the face of weak demand growth and a surge in production from other oil-producing countries.

Christof Ruehl, a senior analyst at Columbia University's Center on Global Energy Policy, said: "The outlook for OPEC+ in 2025 is not optimistic at all. Non-OPEC supplies are enough to cause a surplus in the market. And now, suppressing supply in order to keep prices rising will, of course, exacerbate this situation."

Domestically, GF Futures stated that although the OPEC+ plan to increase production in October has been postponed to December, and EIA crude oil inventories continue to decline, the short-term fundamentals of crude oil are not bad, but the macroeconomic recession expectations and the expectations of weakening supply and demand in the medium and long term are dragging down the trend of oil prices. The downward trend makes it difficult for oil prices to rebound, with Brent oil focusing on support near $65-70 per barrel and the trend of monthly spreads.Looking ahead, international oil prices will continue to face significant downward pressure. Today, the Asia Pacific Petroleum Industry Annual Conference (APPEC) for the year 2024 opened. Several institutions at the conference expressed a pessimistic outlook for oil prices next year.

Daan Struyven, Head of Oil Research at Goldman Sachs, stated that in the face of a market surplus, oil prices will continue to decline in 2025-2026. He mentioned that OPEC may gradually and moderately increase production over the next few quarters.

S&P Global forecasts that OPEC+ and its allies will begin to ramp up oil production in 2025, marking the first time in several years. Jim Burkhard, Vice President of Commodities Research at S&P, indicated that some countries are under significant pressure to increase production, and some have already started to do so.

Institutional analyst Javier Blas noted that the commentary has been quite bearish so far. Oil traders such as Vitol Group, Trafigura, and Gunvor have all indicated that the market supply is very ample. Trafigura, typically a bullish player, believes there is a risk of oil prices "soon" falling to the $60 per barrel range.

Previously, a research report from Citigroup pointed out that there are signs of a considerable supply surplus emerging in the market, with Brent crude futures expected to drop towards the $60 range in 2025. The postponement of OPEC+'s production increase plans, as well as geopolitical factors including supply disruptions in Libya, are expected to support Brent crude prices at $70-72. It is recommended to sell Brent crude around $80 on the rebound, as economic concerns in countries like the United States will drag oil prices further down.