WTI Oil falls to $70 as OPEC production rumors and reduced China demand weigh

• WTI Oil has fallen to the $70 level as rumors OPEC is preparing to ramp up production lead traders to press sell. 
• A slowdown in Chinese demand and weak Manufacturing figures further weigh. 
• Mixed US inventory data, Libyan outages and possible Federal Reserve cuts are further factors.  

West Texas Intermediate (WTI), the US crude Oil benchmark, is declining sharply into the $70.50s, down over 4.0% on Tuesday, as rumors of OPEC+ production cuts and concerns around slowing China demand weigh on the black gold.    

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

"Eight OPEC+ members are scheduled to boost 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," said Reuters. 

The production increases come as OPEC+ struggles to compete with US shale producers. By increasing the output of its members it hopes to push down the price of Oil until it is at or below the cost of production of shale, thereby eroding shale companies' profit margins. 

WTI Oil weakens on slowdown in China demand 

WTI Oil is further pressured by a slowdown in demand from China, the largest Oil consumer in the world. The Chinese economy is growing more slowly and recent data showed Chinese manufacturing activity in August hit a six-month low as measured by 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 deep sell-offs recently, with the Shanghai Composite Index losing 11.88% since May 2024, falling from 3181 to 2803 over the period. 

According to analysts, China's economy is undergoing a structural shift which will make it less dependent on Oil in the future, a further headwind for WTI. These structural changes include "fuel-switching to Electric Vehicles (EV) and from Oil to Liquified Natural Gas (LNG)," said Daan Struyven, Head of Research at Goldman Sachs in a recent interview. 

Oil inventories and Libyan outages to support  

Another factor in the decline in WTI Oil may also be mixed inventory figures reflecting a fluctuation in US demand. The Energy Information Agency (EIA) figures for the week of August 23 showed Oil inventories did not fall as steeply as had been expected and contrasted the API data released on the day before, which showed a deeper-than-expected inventory draw. That said, Oil demand has been high in the US over the summer with eight out of the last nine inventory releases showing a decline in inventories, according to Bloomberg News. 

Oil production in Libya was halted on Monday amid the ongoing conflicts between various factions in the country. Exports were halted at major Libyan ports according to Reuters, as a standoff between rival political factions over control of the central bank and Oil revenue disrupted supply. 

Last week one of the factions, the Libyan National Army (LNA) closed down the Sarir Oil field in protest at the Libyan government's sacking of the Governor of the Central Bank of Libya (CBL), Sadiq al-Kabir. Production at the El Feel Oil field was also halted from Monday. 

Yet, Libyan Oil supply disruption has provided little support for WTI prices. 

"The current disturbances in Libya's oil production could provide room for added supply from OPEC+. But these fluctuations have become quite normal over the last few years, meaning any outages will probably be short-lived; with the news flow indicating signals for a restart of production have already been given," said Bjarne Schieldrop, chief commodity analyst at SEB.

Impact of Federal Reserve

WTI Oil could be impacted by the decisions of the Federal Reserve (Fed) as they contemplate 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 to interest rates in September or just a standard 25 bps cut. The latter is fully expected whilst market-based probabilities for the former sit currently at around 30%, according to the CME FedWatch Tool. A larger cut in interest rates would be bullish for WTI Oil as it would decrease the opportunity cost of holding the non interest-paying asset. 

Whether or not the Fed makes a larger 50 bps cut or not could depend on US labor market data out this week. At a pivotal speech in Jackson Hole, the Fed Chairman Jerome Powell said the downside risks to employment were now greater than upside risks to inflation. 

If labor market data out this week, in the form of JOLTS Job Openings, ADP Employment Change, Jobless Claims, ISM Services Employment Index, and Nonfarm Payrolls (NFP) on Friday, come out weaker than expected, backing up Powell's concerns, it will probably lead the Fed to make a bigger half a percent cut, causing a tumble in the US Dollar (USD) and a recovery in WTI Oil.