The international oil market has entered a phase of unprecedented turbulence recently, primarily characterized by a significant decline in oil pricesThis development is largely attributed to a shifting balance in supply and demand dynamics, with crude oil supplies increasing while global demand wanes due to a bleak outlook for economic growthTwo pivotal aspects of supply are particularly noteworthy, as they might deeply reshape the global oil supply landscape: the decision by OPEC and its allies, known as OPEC+, to pivot from previously established production cuts aimed at stabilizing prices, and a considerable uptick in oil production from South America, which has emerged as a new pillar of global supply growth.

Last week, the price of West Texas Intermediate (WTI) crude oil futures marked its worst weekly performance since October 2023, witnessing an 8% declineAs of September 10, oil prices took a notable plunge, with WTI and London Brent crude futures dropping sharply by 4.31% and 3.69%, respectively

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Following these declines, the prices rebounded on the subsequent days, with WTI and Brent settling at $68.97 and $71.96 per barrel on September 12. This sustained drop in international oil prices has brought them close to a three-year low, leading to an environment of intense market skepticismInvestors are now eagerly observing whether prices will consolidate around the $70 per barrel mark before bouncing back, or if they will continue their downward spiralThe trajectory of international oil prices is becoming a focal point for market participants.

This downturn in oil prices has prompted a swift exit of speculative capital from the marketAs demonstrated in trading data from September 3, hedge funds and other speculative investors have rapidly offloaded their positions, particularly in the most traded oil futures contractsThis has driven net long positions—the difference between bullish and bearish stances—among fund managers to a record low since tracking began in 2011. Notably, the net long position in WTI crude fell by 62,000 contracts to 125,000 contracts, while Brent's positions nearly halved to around 42,000 contracts

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Such trends highlight a substantial reduction in bullish sentiment since early July, revealing an evident shift towards pessimism and prompt sell-offs.

The primary rationale behind the decline in international oil prices centers around altered supply and demand relationshipsAs supply continues to expand, the demand for oil has shrunk due to a dim outlook for global economic growthTwo clear indicators of this bearish sentiment are as follows: first, disappointing economic data from major economies, with evident signs of slowdown in the US and a declining trend in oil demand across East Asia; second, the impending increase in oil production by OPEC+ countries beginning January next year has raised concerns regarding excess supply, further applying pressure on pricesEven the recent decision by OPEC+ to delay its planned increases for at least two months has failed to curb negative market sentiment, as prices continued to decline post-announcement.

In the current context, the performance of the US economy, along with expectations of Federal Reserve interest rate cuts, represents the most significant source of uncertainty affecting international oil prices.

Recent reports from the US Labor Department disclosed that non-farm payrolls in August rose by just 142,000, falling short of the anticipated 165,000. Moreover, data for July was significantly revised down to only 89,000 from the initially reported 114,000, indicating persistent challenges in the labor market

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While the unemployment rate dipped from 4.3% in July to 4.2% in August—marking its first decline since March of this year—the overall job growth appeared concentrated in particular sectors like construction and healthcareNotably, construction jobs increased by 34,000, while healthcare also saw a rise of 31,000 positionsConversely, the manufacturing industry faced a marked decline, shedding 24,000 jobs and exceeding expectations that called for a mere decrease of 2,000 positions.

This mixed bag of economic data reignites fears of a potential recession in the US economyNevertheless, these figures may also pave the way for the Federal Reserve to consider rate cutsOfficials from the Fed stated that they have achieved "significant progress" towards their dual mandate of price stability and maximum employment, noting that inflation is gradually stabilizing around the 2% target, indicating that a rate cut may be appropriate.

The market now anticipates a greater than 50% chance that the Federal Reserve will reduce rates by 50 basis points in September

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Consequently, after the employment data’s release, the yield on two-year US Treasury bonds briefly fell, while S&P 500 futures remained subdued, and the US dollar continued its downward trajectoryMeanwhile, uncertainty looms over the global oil market as investors express concern over the ongoing economic slowdown in the USDespite traditionally peak summer demand, oil consumption has shown signs of weakness, compounded by reductions in oil imports across Asia in the first half of the year, which has dampened the upward pressure on prices.

Two notable changes in the supply landscape warrant close attentionFirst, OPEC and OPEC+ are altering a long-standing strategy of production cuts aimed at price stability, shifting towards planning increased output to fulfill the revenue requirements of member statesOPEC+ has long maintained that its production cuts are temporary and dependent on market balance

Some member countries have had to forgo a share of the global oil market to comply with output restrictions, while others have benefitted from exceeding their imposed quotasFor instance, Iraq's production in August was reported to still exceed its commitment by 320,000 barrels per day, exacerbating internal tensions within OPEC+. Concurrently, non-OPEC+ countries have been seizing the opportunities created by the voluntary market share relinquishment by OPEC+ members.

Currently, oil prices are too low for the majority of OPEC+ member states, many of which supposedly require prices around $80 to $90 per barrel to maintain balanced budgetsAlthough OPEC remains optimistic about a projected increase in oil demand by over 2 million barrels per day in 2024, the current market realities may force the organization to adjust its policies accordingly.

In recent developments, it has been decided in an OPEC+ meeting to cautiously decrease voluntary output cuts starting next year, anticipating an increase in global supply by 180,000 barrels per day

If the major oil-producing nations ramp up their production fully, we may witness a reshuffling of the global oil market as suppliers search for a new equilibrium.

On another front, the increase in oil production from South America has marked a significant rise, establishing it as a new growth point in the world oil supplyReports indicate that Brazilian oil production surged in July by 107,000 barrels per day, reaching an output of 3.52 million barrels daily, further forecasting an average export figure of 3.76 million barrels per day this yearProjections suggest that Brazilian oil production could increase by nearly 400,000 barrels per day next year, with average output likely exceeding 3.9 million barrels per day by 2025.

Meanwhile, Venezuela, a historic oil giant, reported an August production level of 930,000 barrels per day, maintaining a steady monthly growth trendFollowing the easing of US sanctions against Venezuela in the fourth quarter of 2023, the country’s crude output is expected to continue its upward trajectory in 2024 and beyond.

Argentina's oil sector has also shown impressive growth; in the second quarter of this year, its production exceeded a 7% increase year-over-year, with an average of 691,000 barrels per day

Forecasts suggest that this year and next will be marked by robust growth for Argentina’s oil production, with increases of approximately 8% and 13%, respectively, and by the latter half of next year, production is anticipated to surpass 800,000 barrels per day.

In summary, the world oil market faces a challenging oversupply scenario that is unlikely to shift in the short termCitibank's research models project that under the constraints of lackluster global economic growth and declining demand, international oil prices may plunge to as low as $60 per barrel next yearThe ongoing geopolitical tensions do not appear to have significantly impacted oil prices directly, as regional conflicts may provide temporary spikes but ultimately offer sell-off opportunities—as each rebound is weaker than the last.

In recent years, the $70 per barrel mark has become a key support level for the oil market, representing OPEC's threshold for production cuts aimed at maintaining price stability