Oil prices fell on Tuesday (October 14th), closing 1.5% lower as the International Energy Agency (IEA) warned of a large oversupply by 2026, and due to ongoing trade tensions between the US and China, the world's two largest economies.

Brent crude futures fell 93 cents, or 1.5%, to $62.39 a barrel. US West Texas Intermediate crude fell 1.3%, or 79 cents, to $58.70. Both contracts are at their lowest levels in five months. In the previous session, Brent closed 0.9% higher, and US WTI closed up 1%.

The global oil market faces a larger surplus next year, as OPEC+ producers and their competitors increase output while demand remains sluggish, the IEA predicted.

On Monday, a monthly report by the Organization of the Petroleum Exporting Countries (OPEC), and its allies, including Russia, was less pessimistic than the IEA's outlook. The report stated that the oil market supply shortage would narrow by 2026, as the broader OPEC+ alliance continues its planned production increases.

However, executives at major oil companies and leading trading houses said they expect the global oil market to strengthen in the medium to long term, recovering from short-term weakness.

"Recent tensions between the US and China will also put pressure on crude oil, as China's economy could be in question if tensions remain high," said Dennis Kissler, senior vice president of trading at BOK Financial.

UBS analyst Giovanni Staunovo said risk aversion has strengthened as trade tensions weigh on sentiment and the IEA report is pessimistic. US Treasury Secretary Scott Bessent said on Monday that President Donald Trump remains committed to meeting with Chinese President Xi Jinping in South Korea this month.

Washington and Beijing are working to defuse tensions over threats of tariffs and export controls. However, last week, China expanded its rare earth export controls, and Trump threatened 100% tariffs and restrictions on software exports starting November 1.

Beijing also announced sanctions on Tuesday against five US-linked subsidiaries of South Korean shipbuilder Hanwha Ocean, while the US and China will begin imposing additional port fees on ocean-going shipping companies. The six-month Brent crude futures price spread is trading at its narrowest premium since early May, while the WTI price spread is at its narrowest since January 2024.

The narrowing of backwardation, a market term for immediate deliveries commanding a higher premium than later deliveries, suggests traders are making less money selling oil in the spot market because near-term supplies are perceived as abundant. (alg)

Source: Reuters