Rising tensions in the Middle East spark fears of oil supply disruptions as geopolitical factors overshadow fundamentals
The global oil markets have experienced a tumultuous week, primarily influenced by geopolitics and weak fundamentals. Early in the week, oil prices started to decline. However, on Wednesday, prices surged by nearly four percent following the assassination of Hamas leader Ismail Haniyeh in Tehran.
Combined with the killing of a senior Hezbollah commander in Beirut a day earlier and escalating tensions in the Middle East, it has raised concerns about potential supply disruptions from the oil-rich region.
Although Israel has not officially acknowledged the killing of Haniyeh, Iranian officials and Hamas have blamed Israel for the strike that killed him. A U.S. official also informed CBS News’s Margaret Brennan that the U.S. has determined both Haniyeh and top Hezbollah Commander Fuad Shukr were killed in Israeli strikes.
The geopolitical situation escalated when Iranian Supreme Leader Ayatollah Ali Khamenei reportedly ordered a direct strike on Israel in response to Haniyeh’s assassination. Khamenei stated that Israel has “prepared the ground for its severe punishment,” raising fears that the ongoing Hamas-Israel conflict in Gaza could expand into a broader regional war and drive oil prices higher. With tensions increasing in the Middle East, Brent crude oil prices topped US$81 per barrel last Wednesday before retreating slightly, while West Texas Intermediate (WTI) crude prices approached US$79 per barrel.
Despite the promise of retaliation, there has been an eerie silence on the geopolitical front since then. While the possibility of Iranian strikes on Israel cannot be ruled out, as of now, they have not yet occurred. This has diminished the geopolitical premium on crude oil prices. Similarly, in April, when Iran responded to an Israeli attack on its assets in Damascus, its reaction was measured.
Amid weakening fundamentals and global crude demand concerns overshadowing heightened geopolitical risks, oil prices slumped to their lowest in almost eight months by Friday’s close. Brent crude dropped 3.4 percent to settle below US$77 a barrel, its lowest settlement price since early January. For October delivery, it fell by US$2.71 to US$76.81 per barrel, while benchmark U.S. crude oil for September delivery dropped by US$2.79 to US$73.52 per barrel. Both crude benchmarks have lost more than seven percent over the past four weeks, marking the longest run of weekly losses this year.
It seems that fundamentals are back in control, as geopolitical concerns did not last long. “Oil has been pumped up on just extraordinary jitters over the Middle East situation but here we are several days after a significant event,” John Kilduff, a partner at Again Capital in New York, told Reuters.
“We moved from a demand-driven market to a geopolitical one for maybe two days (and) then we absolutely nosedived on all this economic data,” Reuters quoted Tim Snyder, chief economist at Matador Economics, as saying.
Concerns about declining demand in China, the world’s biggest crude importer, and the U.S., the world’s top consumer, have driven oil prices down for the fourth consecutive week, Bloomberg reported. Data released in July showed that China’s total fuel oil imports dropped 11 percent in the first half of 2024, raising concerns about the overall demand outlook in the world’s largest crude importer.
On the supply side, OPEC+ remains on track to boost production starting next quarter, a plan reaffirmed at a monitoring meeting on Thursday. However, officials have emphasized that supply hikes can be paused or reversed if necessary. In the current scenario, this remains a possibility. “Weak economic growth in major economies could stifle oil demand despite increased tensions in the Middle East that could impact supplies,” Panmure Liberum analyst Ashley Kelty told Noah Browning of Reuters.
Falling manufacturing activity in China also inhibited prices, increasing concerns about demand growth after June data showed imports and refinery activity lower than a year earlier. Asia’s crude oil imports in July fell to their lowest in two years, sapped by weak demand in China and India, data from LSEG Oil Research underlined.
Economic data from China and a survey showing weaker manufacturing activity across Asia, Europe, and the United States raised the risk of a sluggish global economic recovery that would weigh on oil consumption.
The rapid reduction of the geopolitical premium in oil markets indicates that oil market fundamentals remain weak despite OPEC’s efforts to control supply. Even if Iran strikes Israel, the geopolitical impact may be short-lived due to the underlying weak oil fundamentals.
Geopolitics has taken a back seat.
Toronto-based Rashid Husain Syed is a highly regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. In addition to his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.
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