Banks Revise Brent Oil Outlook

Global economic concerns and Middle Eastern geopolitical tensions have weighed on oil prices, resulting in downward revisions, but could a definite trend emerge?

Brent to $68 Next Year?

Last week, crude oil prices initially rose after cross-border attacks between Israel and Lebanon raised worries over potential further conflict. However, both sides indicated hostilities had ended, stabilising prices, even accounting for Libyan production losses. Prices also came under pressure after Goldman Sachs forecasted weaker Chinese demand could push Brent to as low as $68 per barrel by late 2025. Yet, a smaller-than-expected drawdown in US inventories mid-week supported crude.

The key issue for oil prices is signs of weakening global demand as investors fear major economies may be entering or already in a slowdown. Last week's stockpile data pointed to this, with exports declining sharply by 9%. Even with indications of softer worldwide consumption, OPEC is reportedly considering rolling back voluntary output cuts, a move some analysts view as an attempt to "penalise" nations like Iraq and Kazakhstan for failing to adhere to agreed quotas.​

All Indications Leaning Downwards?

Goldman Sachs is not the only major bank forecasting declining oil prices, as Morgan Stanley also stated it expects oil futures in the range of $75-78 per barrel. Both predict the crude market will be in surplus, pushing prices lower over the next year.

China, the world's largest importer of crude oil, experienced a loss in momentum in July. Crude demand is expected to remain essentially flat as strong electric vehicle demand reduces reliance on fossil fuels. The country did not face the type of extreme weather requiring larger fuel imports in the summer months of prior years.

Not all agree with Goldman Sachs and Morgan Stanley, with OPEC still insisting demand will outpace supply as production rapidly declines in the medium term due to resource depletion and lack of new exploration. As a sign exploration won't see major resurgence soon, Shell announced it is reducing its division headcount by as much as 20% last week. The differing views, though, do not seem so much related to the oil side but the economic outlook, particularly in China and the US. Oil bulls focus on signs of a rebounding economy and trade, while bears worry a recession has not been completely ruled out. So far, stronger US data indicates a slowdown is unlikely, and the Fed will not ease as much. But that just makes the other side worried the Fed will maintain rates too high for too long, allowing for a harder landing. Perhaps September will provide clearer indication.​

Brent in Incomplete Triangle Pattern

The recent decline in Brent oil prices has brought the energy close to $75 per barrel. A further decrease below $72.50 could send Brent below $70 should the long-term triangle pattern play out, potentially triggering a larger drop than the $68 forecast by Goldman Sachs. However, if prices rebound above both $80.50 and $82 first, it would indicate an incomplete triangle pattern, with significant resistance found at $85.20, a critical Fibonacci retracement level at which the triangle could be completed.

Source: SpreadEx / UK Brent

Key Takeaways

Global economic concerns and geopolitical tensions have weighed on oil prices, resulting in downward forecast revisions. Major banks like Goldman Sachs and Morgan Stanley predict surpluses and prices of $68 and in the $75-78 range over the next year due to signs of weakening global demand. However, OPEC disagrees and believes demand will outpace supply. The differing views centre around economic outlooks, with bears worried about a potential recession and bulls focusing on recovery signs.