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After reaching a 2024 high of almost $85, the oil price has been steadily falling in recent months, dropping to a 16-month low of $65 in September.
So, what has driven oil prices to reach levels last seen in May 2023, and could oil drop further?
Oil demand concerns
Concern surrounding the demand outlook for oil has been one of the principal drivers for falling oil prices.
China
According to the latest report from the International Energy Agency (IEA), global oil demand grew at its slowest pace since 2020 in the first half of 2024 owing to China’s economic slowdown. China, the world’s largest oil importer and the world’s second-largest economy, has struggled amid weak consumer spending, high unemployment, and a deepening property sector crisis.
Due to the economic slump, oil consumption in China contracted for a fourth straight month in July, and without significant stimulus support from Beijing, a swift economic turnaround is unlikely.
US
Meanwhile, concerns surrounding the US demand picture are also keeping oil prices under pressure. Recent data from the US has shown the economy is slowing. While fears of an outright recession have calmed, economic activity has grown more slowly in recent months and the US jobs market is cooling. The timely ISM PMIs showed manufacturing activity was at a 7-month low, and service sector activity was little changed in August.
The Energy Information Agency (EIA) also lowered its 2024 crude price forecasts by more than $1/b in September due to slowing global economic activity, reduced demand in China, and slowing US jobs growth.
Oil supply & risk premium
Middle East risk premium
On the other side of the oil equation is supply. An ongoing concern for the oil markets this year has been the war in Gaza, which is entering its 11 month. While Israel is not an oil-producing country, the market has monitored developments in the Israel–Hamas conflict closely amid fear that the war could spread to other countries in the oil-producing region, particularly Iran through the Iran-backed Hezbollah militants.
When tensions in the Middle East have escalated, the risk premium on oil often rises, lifting the oil price. When there have been signs of progress in peace talks, the risk premium in oil falls, bringing the oil price lower.
The Biden administration has ramped up its efforts to reach a ceasefire agreement in recent weeks. However, any such an agreement still appears a long way off.
OPEC+ supply cuts
Separately, last year, OPEC+, the group of oil-producing nations including Russia, agreed to oil production cuts of 2.2 million barrels per day into 2025. While OPEC had said that they would begin a gradual phase-out of these cuts starting next month, the group recently indicated that they wouldn’t go ahead with increasing supply given the current oil price volatility.
Interestingly, oil prices have fallen to a 16-month low despite OPEC’s decision to continue restricting supply and despite no signs of an Israel-Hamas ceasefire deal being agreed upon soon. This tells us that the market is more concerned about the demand outlook for now.
What next for oil prices?
Should growth in the US and China continue to slow, oil prices are likely to remain under pressure in the coming quarters. Goldman Sachs lowered its 2025 oil price forecast and now anticipates an average price of $80 next year, down from $85, and forecasts an annual range of $70-$85. Meanwhile, Citigroup forecasts oil prices will fall to $60 per barrel in 2025 as demand growth continues to slow.
That said, should tensions in the Middle East escalate or should OPEC restrict supply for longer, oil prices could recover.
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