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(Reuters) – Sentiment in the crude oil market has shifted to expecting prices to decline, with the debate at the industry’s biggest gathering in Asia more about timing than direction.
The topic of presentations and conversations at the annual APPEC conference is always dominated by the outlook for prices, and this week’s event was no different.
What has shifted is market sentiment and the least-sighted animal this year was a bull in a sea of bearish participants.
While there are many factors that drive crude oil prices, the two that dominated APPEC were the decision by OPEC+ to keep unwinding production cuts and the risks to the global economy from the trade and geopolitical policies of U.S. President Donald Trump.
The first is a supply factor and points to the now widespread market expectation that OPEC+ will continue to add barrels back as regaining market share is now more of a priority than defending price levels.
The decision on September 7 by the eight members of OPEC+ undertaking voluntary production cuts to add back 137,000 barrels per day (bpd) of output from October was largely viewed as minor and unlikely to alter the market balance in itself.
But what is seen as significant is the expectation that the producer group, which includes top exporters Saudi Arabia and Russia, will continue to increase output into the first half of 2026 and completely unwind the 1.65 million bpd of cuts from April 2023, having already ended an additional 2.2 million bpd from November 2023.
It’s unlikely that all of these barrels will find their way to the market, but with global demand growth forecasts coalescing at a maximum of 1 million bpd this year and next, it’s still likely that OPEC+ will add back enough to swamp the increase in demand.
The likelihood that non-OPEC oil output will also rise, especially from the Americas outside of the United States, is tilting the market consensus heavily towards a supply overhang in coming months.
The demand side is also clouded with uncertainty, especially over the impact of the tariffs imposed by Trump on imports into the United States.
Estimates of the impact of lifting the average tariff on goods imports from just over 2% to around 18% vary, but the consensus was overwhelmingly that these will act as a drag on growth, while boosting U.S. inflation, but likely lowering it elsewhere.
HIDDEN BULLS?
It was not all doom and gloom at APPEC, with some bullish factors getting an airing.
But the bullish case relies on a few things going better than expected, and a few things getting worse.
On the better side of the ledger, the world economy has sailed through the Trump barrage largely unscathed, with consumer sentiment and spending holding up in developed economies and developing economies able to continue to attract investment and trade.
On the worse side, there would have to be heightened, and more successful, measures to reduce the flow of Russian crude to both India and China, the only major buyers left for oil sanctioned as part of efforts to end Moscow’s war in Ukraine.
More effective measures against Iranian and Venezuelan oil could also have an impact, and there is the ongoing risk of a flare-up in Middle East tensions given the conflict between Israel and Hamas.
In some ways much of the risk premium in the crude market currently is largely dependent on what steps Trump decides to take.
This is somewhat ironic as the one thing the otherwise inconsistent and unpredictable U.S. leader has been consistent on is that he wants lower oil prices.
But it is caution over what he might do that is keeping a risk premium in the market, and helping to keep global benchmark Brent futures anchored around $65 a barrel.
Another unknown is what tactics China’s refiners are likely to adopt in coming months.
They have been storing vast quantities of crude this year, with some estimates as high as 600,000 bpd, and their total storage is now estimated at between 1.2 billion and 1.4 billion barrels, which is well in excess of the 90 days of import cover recommended by the International Energy Agency.
China has been building stockpiles largely on the back of discounted Russian barrels and a lower price trend for other grades in the second quarter of this year.
But the Chinese may be swinging towards the view that oil should be priced more in a $50-$60 range currently, and may start to cut back on imports in order to encourage lower prices.
The views expressed here are those of the author, a columnist for Reuters
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