Oil in Freefall: What’s Behind the Biggest Price Drop in Years and When Will It Bounce Back?

In 2024, oil prices have seen significant volatility, particularly with Brent crude dropping below $60 per barrel for the first time in nearly three years. This dramatic decline has prompted concerns among investors about global demand and the future trajectory of oil prices. Let’s dive into what’s causing this downturn and when, if ever, it might be a good time to buy back into the market.

The Price Range and Recent Decline

Throughout 2024, Brent crude had traded between $73 and $92 per barrel until late August, when prices suddenly plummeted. On September 5th, Brent crude dropped to $68.68—its lowest level since December 2021, while the U.S. benchmark, West Texas Intermediate (WTI), also fell below $65 . This sudden drop marked a 13% decline in Brent’s price since August 26, signalling growing concerns about the demand for oil in a slowing global economy.

ICE Brent Crude Oil - 3-Year Chart:

Why Are Oil Prices Falling?

1. Global Economic Slowdown

A significant factor in the recent oil price drop is the slowdown in major global economies. Growth in China, the world's largest oil importer, has been sluggish. The Chinese property sector, which typically drives a large portion of the country’s steel and oil demand, is in a sharp decline—down 30-40% year-to-date . With demand from China stalling, global demand for oil has taken a hit.

Even in the U.S., the economy is slowing, with job openings falling and consumer spending weakening. While growth in the U.S. remains positive, the Eurozone reported a GDP growth of just 0.6% in the last quarter, and China’s economic growth has stalled at under 5%, well below expectations. This soft demand picture has led to a surplus of supply, putting further downward pressure on prices.

2. Supply Dynamics and OPEC+

OPEC+ has been adjusting production to try to stabilise prices, but even their production cuts haven’t been enough to offset the falling demand. Earlier this year, OPEC+ delayed planned increases in production, but the market reaction has been underwhelming. Some experts believe that OPEC will struggle to maintain prices if demand continues to weaken, and countries like the U.S., Brazil, and Canada continue to pump excess oil into the market.

Commodity Markets Under Pressure

Oil’s decline mirrors similar trends in other commodities like iron ore and copper. For instance, copper bulls were banking on the green energy transition to drive demand, but the expected boom hasn’t materialised as quickly as hoped, largely due to slower growth in China. Lower demand across commodities signals that the broader global economy is struggling to gain momentum, and oil is no exception.

Is It a Buying Opportunity?

While falling oil prices might present an attractive entry point for some investors, caution is warranted. According to Citi analysts, oil prices may fall further due to a “sizeable surplus” in supply, advising investors to sell into any price rallies. On the other hand, some experts believe that demand could rebound in 2025, leading to a recovery in prices.

What Lies Ahead?

For investors, the key question remains: When does oil become a buy? Much will depend on global economic conditions and OPEC+’s ability to manage supply effectively. Analysts from the U.S. Energy Information Administration project that oil could return to $80 per barrel by the fourth quarter of 2024 due to tightening supply from OPEC cuts. However, factors like geopolitical tensions, fluctuating demand, and the green energy transition may continue to impact prices in the long term.

In conclusion, oil’s recent dip below $60 signals a critical juncture for the market. While it may become a buying opportunity in the future, investors should carefully assess the evolving economic landscape before making any commitments.

Speak to an Adviser

Navigating the complexities of the oil market—whether through individual stocks or diversified funds—requires expert insight. Understanding market trends, managing risks, and identifying opportunities in such a volatile environment is crucial. With oil prices shifting dramatically, the right strategy can make all the difference to your portfolio. Consulting with a financial adviser ensures that your investments are aligned with your financial goals while mitigating potential risks. Whether you're looking to capitalise on short-term dips or seeking long-term growth, professional advice is essential in this ever-changing market.