【MACRO Insight】Multidimensional Factors Affecting the Oil Market - Has the Oil Price Erased All Gain

In the current complex global energy market, two key factors are influencing the fluctuation of oil prices. Firstly, according to insiders, due to the oil price falling to its lowest level in nine months, OPEC+ is discussing the possibility of postponing the production increase planned for next month. The original plan to increase production by 180,000 barrels per day in October is being reassessed due to market volatility and a weak demand outlook. The closure of Libyan oil facilities has caused market fluctuations, and concerns about the demand outlook have increased the possibility of OPEC+ considering a delay in production increases.

Furthermore, the reaction of the oil market to a series of recent developments indicates that market sentiment is bearish. For instance, the suspension and potential resumption of Libyan crude oil exports, as well as the Houthi attacks on oil tankers in the Red Sea off Yemen, which could have driven up oil prices, have been overlooked due to concerns about weak demand. Despite OPEC's crude oil production having fallen to its lowest level since January, this news has had a minimal impact on oil prices, with the market focusing more on the demand side.

Meanwhile, Goldman Sachs has put forward a view that differs from traditional perspectives, suggesting that artificial intelligence's potential to boost oil demand is limited and could instead promote supply, ultimately suppressing oil prices. Goldman Sachs estimates that artificial intelligence could reduce costs by improving logistics and increasing the number of profitable extractable resources, thereby increasing crude oil supply and suppressing oil prices over the next decade. This cost reduction could decrease the income of crude oil producers such as OPEC and its allies.

Goldman Sachs further analyzes that the potential boost to oil demand from artificial intelligence may be much less than its impact on the demand for electricity and natural gas. They predict that artificial intelligence could lower oil costs by increasing productivity and improving resource allocation, leading to a decline in marginal incentive prices. Additionally, artificial intelligence could also reduce the cost of new shale oil wells and increase the recovery rate of U.S. shale oil, thereby increasing oil reserves.

The renowned economist Nouriel Roubini, known as “Doctor Doom,” recently gave a pessimistic forecast on the global oil economy in a media interview. He emphasized that tensions in the Middle East are escalating, with the conflict between Israel and Palestine spreading across the region and the risk of triggering a military response from Iran. An escalation of geopolitical tensions into full-scale war could significantly disrupt Iran's oil exports and lead to a sharp increase in crude oil prices.

This would recreate the oil price shocks experienced during the 1973 Yom Kippur War or the 1979 Iranian Revolution, potentially interrupting oil production and transportation in the Gulf region for weeks or even months. Although he acknowledged that, so far, the impact of Middle Eastern conflicts on oil prices has been relatively limited. Roubini has been concerned about potential oil price shocks over the past year, suggesting in 2022 that such a shock could lead to an economic recession or a stagflation crisis similar to that of the 1970s.

Other industry analysts also express concern about significant fluctuations that could occur in the crude oil market, especially if Iran becomes involved in the conflict between Israel and Hamas. An analysis by the Commonwealth Bank of Australia suggests that an Israeli attack on Iran's oil infrastructure could put up to 4% of the global crude oil supply at risk. A strategist at the bank predicts that in such a scenario, Brent crude oil prices could soar to $85 per barrel.

On the other hand, China's refined oil price adjustment window will open again on September 5th. Based on the recent trend of international oil prices, analysts predict that this price adjustment may remain unchanged or there may be a possibility of a decrease. According to calculations by relevant energy consulting firms, as of September 4th, the average price of reference crude oil varieties was $76.36 per barrel, with a change rate of -1.16%, indicating that domestic gasoline and diesel prices should theoretically be reduced by 60 yuan/ton. However, Liu Bingjuan, a refined oil analyst at Longzhong Information, predicts that the reduction may be around 55 yuan/ton, which is close to the 50 yuan/ton price adjustment threshold, so the oil price may remain unchanged or slightly decrease.

This year, China's oil prices have undergone seventeen rounds of adjustments, showing a pattern of “seven increases, six decreases, and four stagnations,” with more increases than decreases overall. After offsetting the rises and falls, the standard prices of gasoline and diesel have increased by 250 yuan/ton and 245 yuan/ton respectively. In the last pricing cycle, due to the lack of obvious positive factors on the demand side and the easing of geopolitical conflicts, international oil prices showed a weak trend, leading to a stagnation in price adjustments. As a result, the retail price of 92-octane gasoline in most parts of the country has been maintained below 8 yuan recently.

During this pricing cycle, changes on the supply side have had a significant impact on international oil prices. Especially at the beginning of this cycle, due to domestic political turmoil in Libya, oil fields and export facilities were temporarily closed, and crude oil production fell by more than 500,000 barrels per day, intensifying market concerns and causing international oil prices to rise sharply. However, according to Jinlian Chuang, the Governor of the Central Bank of Libya, Sadiq Al-Kabir, said on September 3rd that there are “strong” signs that various political factions are close to reaching an agreement to resolve disputes and stimulate the recovery of crucial crude oil production. The industry expects that Libya's crude oil supply of about 500,000 barrels per day may soon return to the market.

At the same time, the continued weakness on the demand side also puts pressure on oil prices. As the traditional consumption peak season in the United States ends in early September, seasonal benefits will gradually disappear. In addition, the global economy and demand performance are weak, and the operating rates of refineries in Asia and the United States are significantly lower than the same period last year, increasing the concerns of practitioners. It can also be noted that due to the lifting of the risk of Libyan crude oil supply, international crude oil prices have seen a significant decline in the last two days. As of 12:55, the UK Brent crude oil futures price was $73.37 per barrel, down 0.53%, and the US WTI crude oil futures price broke through the $70 mark, reporting $69.91 per barrel, down 0.61%, both hitting new lows for the year.

In the context of oil prices falling to their lowest level this year and further declining, the market is worried about the fragile outlook for demand while also paying attention to the news that Libya and OPEC+ may resume supply. Although there have always been different voices, the actual situation is quite different, and oil prices have wiped out all the gains made this year. Investors are also closely monitoring the upcoming release of the US monthly non-farm employment data, which may provide more information on the path of interest rate cuts by the Federal Reserve. Last month's report showed that the unemployment rate has risen to a level that could trigger a recession, increasing market uncertainty. The current dynamics of the oil market are influenced by a variety of factors, including OPEC+ production decisions, geopolitical events, market concerns about the demand outlook, and the potential impact of artificial intelligence on the balance of oil supply and demand.