U.S. crude oil futures fell more than 4% on Tuesday after Israel informed the United States that it does not intend to target Iran’s oil facilities. This announcement eased concerns about a potential major disruption in oil supply from the Middle East.
According to three senior officials from the Biden administration who spoke to NBC News, Israel plans to limit its retaliatory strikes in Iran to military targets. The country has no plans to attack Iran’s oil industry or its nuclear sites.
Earlier this month, oil prices surged after Iran launched a ballistic missile attack against Israel. This incident raised fears that Israel’s response could trigger a series of escalations, disrupting crude supplies in the region.
“Geopolitical risk has completely evaporated from the market,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, during an interview on CNBC’s “The Exchange.”
Tuesday’s Closing Energy Prices:
West Texas Intermediate (WTI)
November contract: $70.58 per barrel, down $3.25, or 4.4%. U.S. crude oil has fallen more than 1% year to date.
Brent Crude
December contract: $74.25 per barrel, down $3.21, or 4.14%. The global benchmark has decreased over 3% year to date.
RBOB Gasoline
November contract: $2.0377 per gallon, down 3.36%. Gasoline prices have retracted about 3% year to date.
Natural Gas
November contract: $2.498 per thousand cubic feet, up 0.16%. Year to date, natural gas prices have dipped slightly.
Oil prices have significantly retreated from the highs seen following Iran’s October 1 attack. With Israel yet to retaliate, traders are now focusing on market fundamentals, anticipating an oil surplus next year.
However, Croft cautioned that any escalation could lead to supply disruptions. If Israel conducts a major strike on military targets in Iran that results in casualties, Iran might respond, prompting further retaliation from Israel.
“The White House was sufficiently concerned about Iranian retaliation that they worked hard to get Israel to reconsider its target list,” Croft noted. She added that Israel might be holding back its options regarding oil until it assesses Iran’s response.
Weakening Global Demand Outlook
OPEC has reduced its oil demand forecast for 2024 for the third consecutive month. The International Energy Agency (IEA) predicts that demand will grow by just under 900,000 barrels per day in 2024 and 1 million barrels per day in 2025. This marks a significant slowdown compared to the 2 million barrels per day growth observed in the post-pandemic period.
Chinese oil demand is particularly weak, with consumption dropping by 500,000 barrels per day in August, marking the fourth consecutive month of decline, according to an IEA report released Tuesday. Meanwhile, crude production in the Americas, driven by the U.S., is expected to rise by 1.5 million barrels per day this year and next, the IEA stated.
The IEA emphasized that its members are ready to act in case of a supply disruption in the Middle East. “For now, supply keeps flowing, and without a major disruption, the market is facing a significant surplus in the new year,” the IEA said in its monthly report.
OPEC also holds millions of barrels per day in spare capacity that could be utilized in the event of a supply crisis. However, according to Croft, Saudi Arabia may take a cautious approach. “The Saudis will be very careful about increasing production if there is any escalation. They will want to confirm a physical supply disruption before taking action,” she said.
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