Over the past two month, oil prices have experienced a brutal sell off declining almost 29% from its September high of $95.03 to Wednesday’s low of 67.71. The persistent decline in oil prices over the past seven weeks has been triggered by several factors such as the impact of recent OPEC+ output cuts and doubts about their effectiveness, the continuous surge in U.S. crude production, a slow post pandemic recovery in China, and uncertainties about global crude demand.

The voluntary output cuts made by OPEC+ failed to impress the markets. OPEC+, recently pledged to cut production by about 2.2 million barrels per day for the first three months of next year. However, scepticism prevails in regard to the effectiveness of the cuts, as they are voluntary not mandatory, and are shorter than previous agreements.

Also, the significant growth in U.S. crude production, has contributed to a perception that global oil supplies could outpace demand. The market sees the recent pledges by OPEC+ to extend the output cuts into the first quarter of 2024 as not likely to make a significant dent in global supply. With the U.S. exporting nearly 6 million barrels of oil daily, OPEC+ members are pressured to lose market share, prompting hesitance among some members to further reduce production.

Apart from supply-side issues, concerns about demand have exacerbated the downward pressure on oil prices, as worries stemming from China are mounting, amid recent data revealing a sluggish post-pandemic recovery. Chinese oil imports in November hit a four-month low, reflecting high stockpiles and muted demand. This has raised concerns about a slowdown in global oil demand growth in 2024, with OPEC and the International Energy Agency offering divergent forecasts.

However, amidst these economic headwinds, the severity of the oil price decline may not be entirely justified, given the demand inelasticity nature of oil prices. The supply side of the equation holds significant influence, and the possibility of additional measures by OPEC+ to stabilize prices could provide crucial support.

Source: TradingView

From a technical perspective, WTI prices are approaching a cluster of previous support between $64.00 and $67.00, which can emerge as a critical support zone once again. However, both bullish and bearish traders are advised to be cautious at this juncture in time, as further declines from here may not be entirely justified, while getting long before a clear trend reversal occurs may be premature. Nonetheless, crude prices may be approaching a turning point and once the down trend clearly reverses course, a strong recovery could unfold, potentially rising to $80.00 – $85.00. The start of a rally could squeeze the excessive number of short positions at present, which would further accelerate the positive momentum. However, the main driver of such potential and sustained rally would be signs of recovery in demand.

Crude prices rebounded sharply on Thursday after the International Energy Agency (IEA) latest monthly report recalibrated its projections for 2024 world oil consumption, revising the estimate upward by 1.1 million barrels per day (bpd). This adjustment, representing a 130,000 bpd increase from the previous forecast, which is attributed to an enhanced outlook for the United States and the influence of lower oil prices. However, the IEA’s optimism is tempered in comparison to the forecast put forth by OPEC+.

Another driver behind Thursday’s surge in oil prices is the depreciation of the U.S. dollar, which hit a four-month low after signals from the U.S. Federal Reserve about the conclusion of the interest rate hike cycle and prospects of lower borrowing costs in 2024, which can stimulate economic growth and increase oil demand associated with lower rates.

The market sentiment was also positively influenced by a more substantial-than-expected draw from U.S. crude inventory. Despite concerns stemming from the recent COP28 agreement, which underscores a commitment to transitioning away from fossil fuels, the IEA’s revised demand outlook suggests a resilient near-term outlook for oil consumption.