Crude WTI prices this week have resumed their downward trajectory, accumulating eight consecutive weeks of declines. WTI is down over 6% since last Wednesday, and even poked through the $58 per barrel level on Tuesday. At this rate, crude could close out the week at the lowest level since last May.
Several factors have pushed crude lower over the last couple of months. Most proximally, the peace deal in Gaza has held despite both sides trading accusations that the other side broke the agreement. But a larger impact can be attributed to OPEC+ raising production throughout most of the year, potentially inducing a supply glut. On top of that, traders are worried that the escalation in the trade war between the US and China could suppress demand. All this raises the question: has oil hit bottom, or can it go lower?
The IEA vs OPEC: Glut or Undersupply.
Last week, the IEA published its report on the state of the crude market, suggesting that there is an impending oil supply glut. The Agency has repeatedly cut its demand forecast and now sees global oil consumption increasing by just 700,000 barrels per day this year. For context, OPEC+ has increased production by 3.1 million barrels over the past year. Analysts believe that OPEC+ will once again agree to boost output at its next meeting.
OPEC, the oil-producing cartel, forecasts demand will rise by 1.3 million barrels this year. That, it says, will leave supply and demand broadly balanced. The Organization is more optimistic about global economic growth, expecting the economy to grow faster and therefore demand more oil, than the IEA does.
The Effect of the US-China Trade War on Crude
The other major factor weighing on Crude WTI prices is the recent escalation in the trade war between the US and China. It has even affected crude shipments directly. The US has raised docking fees on China-bound vessels (including crude) and sanctioned specific Chinese ports that import oil. This has caused large crude tankers to divert, as the US seeks to reduce the amount of Russian and Iranian oil coming on the market.
The main issue, however, is that if a deal between the world’s two largest crude consumers is not reached, higher tariffs could snap back into effect. That could negatively impact both economies and drag on oil demand. One factor governing Crude WTI prices is differing outlooks on how tariffs will affect the global economy and, by extension, demand for crude, which is vital to economic activity.
How to Know if Crude has Bottomed Out
One view, shared by the IEA and central banks like the Fed, is that tariffs will raise costs and slow economic growth. The other, which OPEC and the IMF share, is that businesses will find ways to adapt to the higher tariffs. Any economic slowdown will be short-term, potentially not enough to reduce demand for crude.
Crude WTI prices have been falling amid concerns of a supply glut, suggesting traders expect the global economy to slow. With the US government in shutdown, some key data points on whether that is happening in the world’s largest economy and crude producer are not available. That adds some uncertainty to the equation. But there is a concentration of events that could provide some valuable insight in the coming weeks. Earnings season will give a clearer understanding of where the global economy stands. And the US and China have a deadline for early November to reach a trade deal. After that, the market might have a much clearer picture of whether the economy – and WTI – will rebound.