Investing.com — markets are under increasing downward pressure, with a breakdown in prices pointing to further weakness ahead. 

Analysts at BCA Research in a note dated Friday flag the factors contributing to the recent collapse in oil prices and signals that the worst may not be over.

 Investors are advised to reduce their exposure to oil, as market fundamentals suggest that prices will continue to decline over the next six to nine months​.

One of the primary factors contributing to the fall in crude oil prices is the downward revision of global demand forecasts. 

Major organizations, including the International Energy Agency (IEA), U.S. Energy Information Administration (EIA), and OPEC, have all reduced their oil consumption projections for 2024 and 2025. 

This marks a shift in sentiment from earlier, more optimistic projections. Furthermore, prominent Wall Street banks such as Goldman Sachs, Morgan Stanley, and Citi have all lowered their crude price targets.

This pessimism is supported by weaker-than-expected demand data. During the first half of 2024, global oil consumption growth hit its lowest level since 2020, largely driven by reduced economic activity and lower demand from key markets, especially China. 

China’s reduced crude oil imports in August, down 7% compared to the previous year, have heightened fears about global demand.

While demand is weakening, supply-side dynamics have also played a role in depressing prices. Production from countries outside OPEC, such as Brazil, Canada, and the U.S., has surged, more than offsetting OPEC+ production cuts. 

The 1.5 million barrels per day (b/d) increase from these non-OPEC countries has overshadowed the 1.2 million b/d decline in OPEC+ output.

The result has been a flattening of the oil futures curve, indicating waning enthusiasm for near-term contracts. The price differential between immediate and future deliveries has shrunk, reflecting growing market concerns about oversupply in the face of diminishing demand.

While the outlook for crude oil prices remains bearish, there is a possibility of a near-term bounce. 

Money managers have shed their long positions in oil, with net longs in both Brent and West Texas Intermediate (WTI) reaching record lows. 

Historically, such low net long positions have been followed by price rallies, raising the probability of a short-lived rebound.

However, BCA Research stresses that any potential rally will likely be brief. ”Even in the cases when prices rose, the average 23-day duration of the rally is relatively short,” the analysts said.

The absence of strong fundamental catalysts for sustained demand growth further supports the view that any price recovery would be temporary.

From a cyclical perspective, the path of least resistance for oil prices remains to the downside. Historically, oil prices tend to weaken during the fourth quarter, a period marked by lower demand following the summer driving season. 

Refineries typically conduct maintenance during this time, leading to a buildup in crude inventories, which places additional downward pressure on prices.

Moreover, the broader economic outlook is not favorable for crude.

“BCA Research strategists assign high odds to an economic downturn over the coming 12 months. Thus, global demand conditions for crude oil are likely to deteriorate further,” the analysts said.

The reduction in Saudi Aramco’s official selling price (OSP) for Asian buyers to a near three-year low is another negative signal for the demand outlook​.

BCA recommends that investors should reduce their exposure to crude oil, especially over a six-to-nine-month horizon. 

The note underscores the cyclical vulnerability of oil markets and the high likelihood of continued price weakness. 

While short-term rallies driven by technical factors are possible, they are expected to be fleeting, and prices are likely to revert to their downward trajectory once these rallies lose momentum.

BCA Research also flags the limited effectiveness of OPEC+ efforts to stabilize the market. Even if OPEC+ extends its production cuts, it may not be sufficient to prevent an oil surplus in 2025. 

The coalition would need to make even deeper cuts, which risks internal disagreements and compliance issues​.