In recent weeks, international oil prices have experienced a notable decline, primarily driven by shifting supply and demand dynamicsThis downturn can be attributed to a continuous increase in crude oil supply, while demand has weakened considerably due to bleak global economic growth prospectsTwo significant changes in the supply landscape may profoundly reshape the world’s oil supply structure: first, OPEC and its allies, collectively known as OPEC+, have pivoted from their previous strategies centered around production cuts aimed at stabilizing prices, and have instead begun planning to increase oil production; second, a surge in oil output from South America is emerging as a new growth contributor in the global oil supply landscape.

Last week, West Texas Intermediate (WTI) crude oil futures recorded their worst weekly performance since October 2023, plummeting by an alarming 8%. This downward trajectory persisted into this week, with significant drops observed on September 10th—WTI futures fell by 4.31%, while Brent crude experienced a decline of 3.69%. Following this downturn, a rebound was noted over the next two days; by September 12th, WTI futures closed at $68.97 per barrel, and Brent at $71.96 per barrel

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The ongoing trend of falling international oil prices has led to levels not seen in three years, fostering a cautious market sentimentThe pivotal question remains whether oil prices will stabilize around the $70 mark before bouncing back or continue their downward spiralThe international oil price trends are attracting considerable attention.

The turbulence within the international oil market has spurred a hasty retreat of speculative fundsData from exchanges on September 3rd revealed a marked acceleration in sell-offs by hedge funds and other speculative investors—particularly in the highly-traded oil futures contractsMany fund managers significantly reduced their overall net long positions (the difference between bullish and bearish bets) to levels not observed since data collection began in 2011. Specifically, the net long position in WTI crude oil decreased by 62,000 contracts to 125,000 contracts, while Brent crude's net long position was nearly halved to around 42,000 contracts

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Since early July, traders’ bullish bets have halved, indicating a cumulative bearish sentiment that has now started to manifest into broader selling.

The primary driving force behind the decline in international oil prices stems from changing supply-demand relationshipsWhile crude oil supply continues to expand, global oil demand has felt the pinch due to pessimistic growth outlooks for the world economyTwo main arguments underpin this bearish sentiment: first, key economic indicators from major global economies are underwhelming, with evident signs of a slowdown in the American economy and a decline in oil demand trends across East Asia; second, fears of oversupply loom as OPEC+ members plan to increase production starting early next year, further pressuring oil pricesEven a recent decision by OPEC+ to postpone its previously scheduled production increases from October by at least two months did little to curb the prevailing negative market sentiment, as oil prices continued to fall following this announcement.

Current scenarios suggest that the performance of the US economy, along with expectations surrounding potential interest rate cuts by the Federal Reserve, serve as the most significant uncertainty factors impacting international oil prices.

Recent reports from the US Bureau of Labor Statistics revealed that 142,000 new jobs were added in August, falling short of the expected 165,000. Additionally, the data for July was heavily revised down from 114,000 to 89,000, while June’s figures were adjusted downward by 61,000, indicating that the labor market continues to struggle

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The unemployment rate dipped from 4.3% in July to 4.2% in August—remaining consistent with expectations and marking the first decline since March of this yearJob growth was notably concentrated in sectors such as construction and healthcare, with the construction industry adding 34,000 jobs, while healthcare contributed 31,000. Conversely, manufacturing showed significant signs of deterioration, losing 24,000 jobs—far exceeding the anticipated reduction of 2,000. Other major industries, including mining, wholesale, retail, transportation and warehousing, information, financial activities, leisure, and hospitality, exhibited stable employment conditions.

The mixed and somewhat tepid data has reignited concerns about a potential recession in the United StatesHowever, this information also paves the way for possible interest rate cuts by the Federal Reserve, which has stated that significant progress has been achieved in maintaining price stability and achieving maximum employment goals

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The inflation rate is gradually moving towards a target of 2%, making it seem appropriate to lower the federal funds rate.

Market forecasts indicate that the likelihood of a 50 basis point rate cut by the Federal Reserve in September is greater than halfConsequently, following the release of US jobs data, two-year Treasury yields dipped briefly, S&P 500 futures remained subdued, and the dollar continued its downward trendSimultaneously, the global oil market harbors doubts, as investors fret over the implications of a slowing US economy, with oil demand failing to meet expectations during the peak summer demand seasonAdditionally, decreased oil imports in Asia during the first half of the year have suppressed the potential for oil price recovery.

On the supply side, two significant changes warrant close attention.

On one hand, OPEC and OPEC+ are altering their long-established strategies of production cuts aimed at price stabilization, planning instead to boost oil output to accommodate revenue demands from member countries

Historically, OPEC+ has consistently contended that their production cuts are temporary and contingent on market equilibriumConsequently, some member nations have had to concede market share to comply with production cut requirements, while others, such as Iraq, have reaped profits due to non-compliance with their production quotas—evident in Iraq's August production surpassing its committed quotas by 320,000 barrels per day, worsening internal tensionsMeanwhile, non-OPEC+ countries are seizing portions of the market share relinquished by OPEC+ due to the latter's restraint in production.

Currently, the price levels for crude oil are reportedly too low for most OPEC+ member countries, with estimates suggesting that prices need to hover around $80 to $90 per barrel to balance national budgetsNonetheless, OPEC is maintaining an optimistic outlook for oil demand growth in 2024, estimating an increase of more than two million barrels per day this year

However, the reality runs counter to expectations, compelling OPEC to adjust its policies in accordance with current market conditions.

Recent updates indicate that an OPEC+ meeting has resolved to cautiously reduce voluntary production cuts starting next year, thus increasing market supply by about 180,000 barrels per dayIf major oil-producing nations within OPEC ramp up production, the world oil market may undergo another reshuffle until a new equilibrium is established.

On the other hand, oil production in South America is ramping up significantly, presenting itself as a new growth factor in global oil supply.

Statistics reveal that Brazil's oil output rose by 107,000 barrels per day in July compared to the previous month, reaching a total of 3.52 million barrels per dayIt is projected that Brazil's average annual oil exports will hit 3.76 million barrels per day this year

As for next year, Brazil's oil output is expected to increase by nearly 400,000 barrels per day, with average production exceeding 3.9 million barrels per day by 2025.

Additionally, Venezuela, a traditional oil giant, achieved an oil production rate of 930,000 barrels per day in August, demonstrating a consistent monthly growth trendSince the relaxation of US sanctions against Venezuela in the fourth quarter of 2023, the nation’s oil output has gradually escalated, and this growth is expected to continue over the next one to two years.

Argentina's oil production has also demonstrated remarkable growthIn the second quarter of this year, the country’s oil output increased by over 7% year-on-year, averaging 691,000 barrels per dayEstimates suggest that 2023 and 2024 will be robust years for Argentina’s oil production, with growth rates around 8% and 13%, respectively, and oil output is predicted to surpass 800,000 barrels per day by the second half of next year.

In summary, the oversupply situation within the global oil market is likely to persist in the short term

According to research models from Citibank, amid weak economic growth and dwindling demand, international oil prices could dip to $60 per barrel next yearFurthermore, the bank noted that the ongoing geopolitical tensions have not exerted massive direct impacts on oil pricesWhile regional conflicts may cause temporary spikes in prices, every rebound has been weaker than the last, thus providing opportunities for sell-offs.

In recent years, the $70 per barrel figure has emerged as a crucial support level for the oil market and serves as OPEC's baseline for production cuts aimed at maintaining price stabilityCurrently, the international oil market outlook remains decidedly bearish, having breached this critical psychological thresholdThe future trajectory remains uncertainThe oil market espouses the adage that low prices are the cure for low pricesOPEC may potentially adjust its strategies to tolerate temporary price declines while focusing on long-term stability, which could come into clearer relief in the aftermath of Federal Reserve interest rate cuts