WTI drops to $70 as OPEC output rumours and reduced Chinese demand weigh

• WTI oil has fallen to the $70 level due to rumors that OPEC is preparing to increase production, leading traders to sell.
• A slowdown in Chinese demand and weak manufacturing figures are also weighing.
• Mixed US inventory data, disruptions in Libya and possible Federal Reserve cuts are other factors.

West Texas Intermediate (WTI), the benchmark for US crude, is falling sharply to $70.50 per barrel, down more than 4.0% on Tuesday, as rumors of OPEC+ production cuts and concerns about slowing demand in China weigh on the black gold.

Six sources from the Organization of the Petroleum Exporting Countries (OPEC) and its allies recently told Reuters that the organization plans to increase production from October.

“Eight OPEC+ members are scheduled to raise output by 180,000 barrels per day (bpd) in October as part of a plan to begin unwinding their most recent supply cuts of 2.2 million bpd, while keeping other cuts in place until the end of 2025,” Reuters said.

The production increases come as OPEC+ struggles to compete with U.S. shale producers. By boosting output from its members, it hopes to drive down the price of oil until it is at or below the cost of producing shale, thereby eroding shale companies’ profit margins.

WTI oil weakens as demand in China slows

WTI oil is further pressured by a slowdown in demand from China, the world’s largest oil consumer. The Chinese economy is growing more slowly and recent data showed that Chinese manufacturing activity in August hit a six-month low, according to the official manufacturing PMI. Although a separate private survey, the Caixin manufacturing PMI, showed an increase in activity, markets were spooked.

Chinese stocks have seen massive sell-offs recently, with the Shanghai Composite Index losing 11.88% since May 2024, falling from 3,181 to 2,803 during the period.

According to analysts, China’s economy is undergoing a structural change that will make it less dependent on oil in the future, an additional headwind for WTI. These structural changes include “fuel shifting to electric vehicles (EV) and from oil to liquefied natural gas (LNG),” said Daan Struyven, head of research at Goldman Sachs in a recent interview.

Oil inventories and disruptions in Libya to support

Another factor in WTI’s decline may also be mixed inventory figures reflecting fluctuating U.S. demand. Figures from the Energy Information Agency (EIA) for the week of August 23 showed that oil inventories did not fall as sharply as expected and contrasted with API data released the day before, which showed a larger-than-expected drawdown in inventories. That said, oil demand has been high in the U.S. over the summer, with eight of the last nine inventory releases showing a decline in inventories, according to Bloomberg News.

Oil production in Libya halted on Monday amid ongoing conflicts between various factions in the country. Exports were halted at Libya’s main ports, according to Reuters, as a standoff between rival political factions over control of the central bank and oil revenues disrupted supplies.

Last week, one of the factions, the Libyan National Army (LNA), shut down the Sarir oil field in protest against the dismissal of the governor of the Central Bank of Libya (CBL), Sadiq al-Kabir, by the Libyan government. Production at the El Feel oil field has also been halted since Monday.

However, the disruption to Libyan oil supplies has provided little support to WTI prices.

“Current disruptions to Libyan oil production could provide scope for additional OPEC+ supply. But such fluctuations have become fairly normal in recent years, meaning any disruption will likely be short-lived, with news flow indicating that signals for a production restart have already been given,” said Bjarne Schieldrop, chief commodities analyst at SEB.

Impact of the Federal Reserve

WTI crude oil could be affected by the Federal Reserve’s (Fed) decisions as they consider cutting interest rates in the US amid a slowdown in inflation.

Markets are currently debating whether the Fed will need to make a 50 basis point (bps) cut in interest rates in September or just a standard 25 bps cut. The latter is fully expected, while market-based probabilities for the former currently stand at around 30%, according to the CME’s FedWatch tool. A larger interest rate cut would be bullish for WTI oil as it would lower the opportunity cost of holding the non-interest-paying asset.

Whether the Fed cuts by more than 50 bps or not could depend on US labour market data due this week. In a crucial speech at Jackson Hole, Fed Chair Jerome Powell said the downside risks to employment now outweighed the upside risks to inflation.

If the labor market data due out this week, in the form of JOLTS job openings, ADP employment change, jobless claims, ISM services employment index, and non-farm payrolls (NFP) on Friday, turn out to be weaker than expected, supporting Powell’s concerns, it will likely lead the Fed to make a larger cut of half a percentage point, causing a drop in the US Dollar (USD) and a rally in WTI oil.