Crude oil prices fell sharply as Israel launched a restrained retaliation against Iran, specifically sparing its oil and nuclear sites. Adding to the downward pressure, China’s release of disappointing economic data has weakened the outlook for global crude demand.
Crude prices tumbled more than 5% before partially recovering during Asian trading on Monday. The decline followed reports that Israel’s response to Iran’s October 1 ballistic missile attack avoided key Iranian oil and nuclear infrastructure. According to Iranian state media, the country’s oil production remains unaffected.
The limited military engagement has eased fears of a broader conflict in the Middle East, which could have severely impacted global oil supplies.
Michael Brown, Senior Research Strategist at Pepertone in London, noted, “This situation could resemble April, where both sides managed to save face, potentially allowing tensions to cool, at least for the short term. If this trend continues, we could see the risk premium in oil prices diminish, weakening one of the main supports for bullish investors, especially with the demand outlook remaining bleak.”
By 8 a.m. CET, Brent crude for January delivery had dropped 4.06% to $72.56 per barrel, while December contracts for West Texas Intermediate (WTI) were down 4.42% to $68.63 per barrel. Both benchmarks hit their lowest levels since October 1.
Economic Concerns Weigh Heavily
Oil prices have been seesawing between positive and negative factors all year. While the Middle East conflict recently buoyed prices by overshadowing economic concerns, persistent weak demand, especially amid China’s economic slowdown, has capped potential gains.
In April, crude prices saw a steep decline from six-month highs due to ceasefire negotiations between Israel and Hamas, as temporary geopolitical relief calmed markets. Iran’s missile attack earlier this month escalated tensions, pushing oil prices upward temporarily.
Now, however, economic concerns are once again dominating the oil market. China’s National Bureau of Statistics reported over the weekend that industrial profits fell 27.1% in September year-on-year, marking the steepest drop since the pandemic.
Additionally, a report from the International Energy Agency (IEA) suggests that oil demand growth will be halved in 2024 and 2025 compared to recent years, driven mainly by slowing Chinese demand. The IEA noted, “China is driving this deceleration, accounting for about 20% of global growth this year and next, compared to nearly 70% in 2023.”
OPEC’s Output Increase Plan Moves Forward
OPEC and its allies met on October 2 and agreed to proceed with plans to increase oil production starting in December. However, the group highlighted the need for additional cuts by some members to counterbalance overproduction.
The alliance aims to boost production by 180,000 barrels per day while gradually reversing its voluntary cuts from late 2022. OPEC+ has been reducing output by 5.9 million barrels per day, or 5.7% of global demand.
Earlier in October, OPEC+ revised its demand forecast downward for 2024 and 2025, now projecting an increase of 1.93 million barrels per day in 2024, compared to a previous forecast of 2.03 million barrels. This revision also reflects China’s shift towards greener energy sources.
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