Oil prices experienced significant declines in the third quarter, dropping by 17% as concerns over a potential conflict escalation in the Middle East were outweighed by slowing global demand. On Monday, Brent crude futures for November delivery settled at $71.77 per barrel, marking a 9% drop in September alone. West Texas Intermediate (WTI) futures also fell slightly, ending at $68.17 per barrel, capping a quarter that saw a 16% decline. This marks the largest quarterly drop for WTI since the third quarter of 2023.
Despite fears that escalating tensions in the Middle East could disrupt oil supply, particularly after Israel's recent strikes targeting Hezbollah and Houthi groups, the broader global economic environment has kept oil prices under pressure. Iran, a key player in the Organization of the Petroleum Exporting Countries (OPEC), has supported these groups, raising concerns that the conflict could draw in larger oil-producing nations. However, these geopolitical risks have been tempered by concerns about weakening demand.
The global demand picture has been clouded by disappointing economic data from key regions. In China, the world's second-largest economy and a major oil importer, manufacturing activity shrank for the fifth consecutive month in September. Additionally, Saudi Arabia's recent decision to ramp up production in December has added to bearish sentiment, as market participants anticipate a further increase in supply. Jim Ritterbusch of Ritterbusch and Associates noted that Saudi Arabia's actions could serve as an "overriding bearish consideration" in the oil market for weeks to come.
Libya's potential recovery of oil output has also contributed to downward pressure on prices. The country's eastern-based parliament approved a new central bank governor, which could pave the way for an end to the crisis that has severely curtailed Libyan oil production. This potential increase in supply from Libya, along with OPEC's relaxation of production curbs, is further weighing on the market.
Oil markets have also been closely tracking developments in Israel and Lebanon, where recent hostilities have raised concerns about regional stability. Israel's airstrikes in Beirut have heightened fears of a wider conflict, particularly given the involvement of Iran-backed groups like Hezbollah. Despite these tensions, oil production in the region has largely remained stable, with no major disruptions to supply reported. RBC Capital Markets analyst Helima Croft noted that while there is no immediate threat to oil output, the uncertainty surrounding the conflict makes it "extremely difficult to see where this regional conflict is headed."
The broader macroeconomic picture has played a significant role in the recent downturn in oil prices. In addition to concerns about China's economic slowdown, investors are also watching closely for signals from the U.S. Federal Reserve. Fed Chair Jerome Powell's recent comments that the central bank is in no hurry to cut interest rates have contributed to a cautious outlook for oil demand. The prospect of higher borrowing costs has raised fears of a slowdown in global economic growth, which could further dampen demand for crude.
Looking ahead, market participants are eyeing OPEC's upcoming meeting, where the group will assess global market conditions. While some analysts have speculated that the organization could consider further cuts to support prices, several delegates have indicated that there are no immediate plans to change production policy.
Despite the gloomy demand outlook, there are still pockets of optimism. Some analysts believe that the easing of tensions in certain parts of the world, coupled with potential production cuts, could help stabilize the market. For now, however, oil prices remain under pressure as global economic concerns continue to outweigh supply-side risks.
