Brent Bounces off Lows, But Can it Continue

Brent crude futures rose above $75 per barrel on Tuesday following China's announcement of its largest pandemic-era economic stimulus package, as China imports the most crude oil globally. The unexpected yet anticipated interest rate cut by China's central bank supported China's economy. However, analysts questioned whether lower rates would be maintained. Chinese stocks rebounded in response, though other global markets remain uncertain about consistent growth in China, the world's second-largest economy.

Over the past week, tensions have escalated in the Middle East as Israel, with missiles being exchanged daily between Israel and Hezbollah, also supporting upside for the oil. While creating a dramatic backdrop, markets focus more on demand as conflicts could spread to oil producers. Moreover, Tropical Storm Helene, which is developing in the Gulf of Mexico and is expected to become a hurricane, could also have supported oil prices. But the storm is forecast to miss most offshore rigs in its projected path along the Florida Panhandle later this week.

The Opposite of a Bounce

On Tuesday, OPEC increased its long-term expectations for demand, saying growth in India and Africa and a slower shift to electric vehicles means crude oil will be needed more from now until 2050. The next day, reports showed that many oil producers require higher prices to sustain themselves. According to the IMF, Saudi Arabia, the largest producer, needs oil above $96.20 per barrel to keep the government budget out of deficit. The major OPEC producers clearly need oil demand to continue being strong and maintain long-term profitability of production. However, it seems investors are more worried about the short-term weakening of demand this year and next.

The International Energy Agency disagrees with the magnitude of growth predicted, and analysts generally have a bearish view of oil demand and, therefore, prices in the near future. These analysts point to lacklustre demand from China, which is aggressively moving towards electrification. Additionally, while OPEC+ seeks to limit supply with voluntary production cuts from its largest producers, other countries such as the US, Brazil and Guyana are looking to ramp up production. Recent softer economic data from the US also suggests potential slowing demand from the world's largest consumer.​

Brent Leaves Behind Support

The price of Brent oil has extended its long-term losses of the initial downward trend to $68.60 per barrel, forming a double-bottom pattern that has the potential to push prices back up to $95 in the long run. However, while prices remain below the swing highs of $82.50 and $88, the chances of this occurring remain slim. Conversely, if prices were to fall below the key support level of $65 seen in 2021 following a break of the $70 handle, this could accelerate the existing downward trend further.

Source: SpreadEx / Brent Crude

Key Takeaways

The price of crude oil fluctuates due to projections of future energy needs weighing against economic growth concerns. Brent crude rose above $75 on China's stimulus but analysts questioned sustainable lower rates. Middle East tensions supported prices but storms turned away from rigs. While OPEC predicted long-term demand growth, analysts foresee weaker near-term demand from China and potential oversupply from increased US and others' production.