Oil prices are under pressure, currently around $70 per barrel, with predictions indicating a decrease in the market. The International Energy Agency (IEA) and the U.S. Energy Information Administration expect a surplus of oil next year, with the IEA projecting an excess of 2 million barrels daily. Francisco Blanch from Bank of America Corp notes that this surplus, particularly in the second half of the year, will likely drive prices down. TotalEnergies SE has also observed that the market has a strong supply as the OPEC+ alliance loosens production limits, even as global growth slows down and affects demand.

Additional Oil Supply Developments

Meanwhile, Norway’s Equinor ASA is fully ramping up production at its Johan Castberg field, and Brazil plans to activate its offshore resources. These developments indicate more oil supply coming from outside the OPEC framework. We see a market where current prices are stable, but there’s a clear risk of oversupply ahead. This difference between today’s prices and future supply creates unique opportunities for trading strategies. Our goal is to prepare for potential price drops in the upcoming months rather than just focusing on today’s prices. The IEA’s forecasts are important, and we take them seriously. The U.S. Energy Information Administration supports this view, projecting in its June 2024 outlook that global oil inventories will rise through 2025. This rise in supply indicates that long-term futures contracts may be overpriced compared to the current market.

Potential Trading Strategies

Blanch’s comment about a surplus in the second half of the year indicates a well-established trading strategy. We are considering selling longer-term contracts, particularly for the fourth quarter of 2024 or the first quarter of 2025. Historically, when there is an oversupply, prices for these longer contracts tend to drop quicker than those for shorter contracts, benefiting bearish calendar spreads. Warnings from the French energy firm and the recent OPEC+ decision to reduce production cuts in October highlight a clear trigger for lower prices. To take advantage of this while managing risk, we are looking at purchasing put options with strike prices below $65 for December 2024. These options offer limited initial costs while providing protection against downward price movements. Also, the increasing oil supply from outside the traditional OPEC countries is significant. For example, the new Norwegian field is contributing over 100,000 barrels per day, and Brazil’s output is steadily rising, with recent government reports showing production consistently above 3.4 million barrels per day. This reliable flow of non-OPEC oil acts as a counterweight to any major price increases. Create your live VT Markets account and start trading now.

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