Crude oil prices fell more than 4% last week as concerns about weak global demand overshadowed fears of supply disruptions caused by ongoing geopolitical tensions in the Middle East. The energy market remained sensitive to developments in the Israel-Iran conflict. Reports indicated that Iran, a key member of OPEC, might retaliate against Israeli military actions, raising worries about potential supply disruptions in a region crucial for global oil production.
According to Polymerupdate Research, benchmark Brent crude futures on the InterContinental Exchange dropped 3.88%, or $2.95 a barrel, closing the week at $73.10. The contract started at $76.05 on Monday and fell sharply to $71.42 the next day. Fluctuations in crude futures were driven by mixed reports regarding the Israel-Iran conflict, which could affect world oil supply.
West Texas Intermediate (WTI) futures on the New York Mercantile Exchange also saw a decline of 3.19%, or $2.29, ending the week at $69.49 after starting at $71.78. Increasing supply from non-OPEC nations and weak demand from China, the world’s second-largest economy, further pressured prices, despite the geopolitical situation.
Weak economic indicators from key markets, especially in Europe and China, have dampened oil demand forecasts. Europe’s sluggish growth and disappointing industrial output from China contributed to a bearish outlook for oil prices. Additionally, rising U.S. crude inventories highlighted ongoing demand weakness. International bodies, including the United States and the United Nations, have urged restraint in the Middle East to prevent further escalation that could threaten global energy security.
AnandRathi Investment Services noted that crude futures were highly volatile last week, initially dropping due to Israel’s limited attack on Iran, which did not damage oil facilities. The market then rebounded on concerns about OPEC+ delaying production increases and signs of recovery in China’s economy. Although tensions escalated, Iran’s oil and nuclear facilities remained unharmed.
Rahul Kalantri, Vice President of Commodities at Mehta Equities Ltd, stated that oil prices showed significant volatility, recovering from lows due to a decline in U.S. oil inventories. This recovery was supported by geopolitical tensions and OPEC+’s potential delays in production increases. However, the U.S. dollar’s strength and weak European economic data capped gains. Kalantri expects continued volatility in the short term, influenced by fluctuations in the dollar index, geopolitical uncertainties, and the upcoming U.S. presidential elections.
Market observers are closely watching the U.S. presidential election set for November 5, 2024, as well as a Federal Reserve meeting later this week. Weaker October job data in the U.S. has fueled hopes for interest rate cuts, which could create buying opportunities depending on the election outcome.
Growing confidence in Donald Trump’s potential victory has seen equities, the dollar, and Treasury yields rise in recent weeks. A Trump win could lead to dollar volatility, while a victory for Kamala Harris might signal higher taxes and a less favorable business environment. Fed Chair Jerome Powell’s comments during the upcoming meeting will also be crucial for market movements, particularly affecting gold prices.
OPEC+ Plans to Extend Production Cuts
OPEC+ is considering delaying a planned production increase set for December due to fears that higher output could exacerbate price pressures amid low demand. A final decision will be made during the OPEC+ meeting scheduled for December 1. In April 2023, OPEC+ initiated a voluntary output cut of 1.657 million barrels per day (bpd) to stabilize falling prices following sanctions against Russia after its invasion of Ukraine.
Saudi Arabia announced a 500,000 bpd cut, joining other countries like Iraq, the United Arab Emirates, and Kuwait in reducing production. OPEC+ has already implemented a 2 million bpd cut since October 2022. In November 2023, additional voluntary cuts of up to 2.2 million bpd were announced to maintain oil market stability, set to take effect from January 1 through March 2024.
OPEC+ aims to extend these voluntary production cuts into 2025 to control supply and support higher global oil prices. The cartel has signaled a gradual phasing out of production cuts throughout 2024.
Market Outlook
The outlook for crude oil prices remains cautiously optimistic in the short term due to geopolitical risks countering weak market fundamentals. The upcoming U.S. presidential elections and interest rate decisions will likely keep markets volatile. Rising tensions between Israel and Iran could disrupt Middle Eastern oil supplies, potentially pushing prices up to $71.62 or $74.51 if conflicts escalate. However, weak demand from China and soft Asian markets pose downside risks. Even if OPEC+ delays its planned output increase, the market may face bearish pressures. If tensions de-escalate, prevailing supply and demand fundamentals could drive prices back down to the $67.50-$65 range.
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