Category: Natural Resources

Oil prices fell sharply on Tuesday, dropping more than 5%, as geopolitical concerns surrounding Israel and Iran’s oil industry began to ease. Initially, fears of potential supply disruptions spiked oil prices after Iran launched a missile attack on Israel earlier this month, but the market has now calmed as Israel is not expected to strike Iran’s oil infrastructure.

At the same time, the International Energy Agency (IEA) has weighed in, signaling that its member nations are prepared to take action if any supply disruption occurs in the Middle East. For now, however, global oil supply remains steady, and with the absence of major disruptions, the market faces a likely surplus in the new year.

As of Tuesday morning, energy prices were reacting to both the geopolitical environment and broader market dynamics:

• West Texas Intermediate (WTI) November futures fell by $3.74, or 5.07%, to $70.08 per barrel. Year to date, U.S. crude oil has seen a 2% decline.
• Brent crude, the global benchmark, fell by $3.67, or 4.7%, to $73.79 per barrel, continuing its year-to-date drop of about 4%.
• Gasoline prices also dipped, with the November contract down 4.47% to $2.014 per gallon, bringing year-to-date losses to nearly 4%.
• Natural gas was the exception, seeing a slight rise of 1.36% to $2.528 per thousand cubic feet.

The significant drop in crude prices reflects more than just geopolitics. The oil market has been facing weakening demand, particularly from China, and ongoing concerns about a global economic slowdown. OPEC’s recent decision to cut its 2024 oil demand forecast for the third consecutive month has further contributed to the pressure on oil prices.

China’s oil consumption has been particularly weak in recent months, with the IEA reporting that Chinese demand dropped by 500,000 barrels per day (bpd) in August. This marked the fourth consecutive monthly decline, adding to the overall bearish sentiment surrounding global oil demand.

The broader outlook for 2024 and 2025 also suggests slower demand growth compared to the post-pandemic recovery. The IEA projects global oil demand to increase by just under 900,000 bpd in 2024 and 1 million bpd in 2025, which is a noticeable drop from the 2 million bpd growth seen in the previous years.

At the same time, crude production in the Americas, particularly the U.S., is on track to grow. According to the IEA, American-led production will increase by 1.5 million bpd this year and next, further contributing to the global supply glut.

For the third consecutive month, OPEC has revised its oil demand forecast downward, reflecting concerns about slower economic growth and subdued consumption in major markets like China. The cuts come as the cartel faces pressure to balance supply with softer global demand.

As a result of these factors, analysts now expect the oil market to shift its focus away from geopolitical fears and towards demand weakness, which could define the market’s trajectory in the months ahead. While geopolitical events may continue to inject short-term volatility, the more significant concern remains the fundamental imbalance between supply and demand.

Oil prices surged on Tuesday following warnings from the US that Iran is preparing to launch an attack on Israel within the next 12 hours. This development has significantly heightened concerns over possible disruptions to oil supplies in the Middle East, a region that produces a third of the world’s crude oil.

West Texas Intermediate (WTI) crude saw an immediate increase of nearly 4%, reaching close to $71 a barrel, while Brent crude, the global benchmark, climbed above $74. The potential conflict in this geopolitically critical area may lead to further price hikes if tensions escalate and oil output is impacted. Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), was the ninth-largest oil producer in 2023, pumping over 3.3 million barrels a day as recently as August.

“The key factor for crude will be whether Israeli defense systems are able to shield against the attack and what subsequent actions Israel might take,” said Rebecca Babin, senior energy trader at CIBC Private Wealth. “In the near term, we could see a few more dollars of short covering in crude.”

This possible disruption marks the most significant threat to oil markets since Russia’s invasion of Ukraine, an event that sent global markets into turmoil last year. Surging oil prices are likely to become a significant concern for consumers and governments, especially in countries like the US where gasoline prices are a political flashpoint. Both major presidential candidates are expected to focus on preventing a further spike in gas prices, with the cost of oil playing a central role in domestic economic debates.

The geopolitical threat comes at a time when oil traders had been betting heavily on bearish market trends, largely driven by concerns of weakening demand growth. The elevated short positions have left the market vulnerable to sharp upward movements if these bearish bets need to be unwound quickly in response to rising tensions in the Middle East.

Concerns about the Middle East have been escalating following the death of Hezbollah leader Hassan Nasrallah last week. In retaliation, Israel has launched airstrikes on Beirut and initiated “targeted ground raids.” As the region braces for further conflict, investors are anticipating potential volatility in the oil market, with Brent crude volatility indices reaching their highest levels since January.

Previously, oil prices had dropped in recent months amid expectations that OPEC+ would increase production just as non-OPEC nations, including the US, ramped up their output. Additionally, China’s weakening demand, as the world’s largest crude importer, has added downward pressure on prices. However, this latest geopolitical flare-up could reverse these trends, injecting fresh instability into global energy markets.

As investors brace for further developments, the oil market remains on edge, with any direct involvement from Iran likely to further disrupt global supplies and drive prices higher.