Oil prices dropped sharply on Tuesday, with U.S. crude falling nearly 5% after reports that Israel is not planning to strike Iran's oil facilities, alleviating fears of a major disruption in the global oil supply. West Texas Intermediate (WTI) crude futures for November delivery settled at $70.15 per barrel, down $3.68, or 4.98%, marking one of the largest single-day declines in recent weeks. Brent crude, the global benchmark, also saw a significant drop, falling 4.7% to $73.82 per barrel.
The market had been on edge since Iran's ballistic missile attack on Israel earlier this month, which sparked concerns of a potential escalation that could disrupt oil flows from the Middle East. However, Israel's decision to limit its retaliatory strikes to Iranian military targets, rather than nuclear or oil facilities, significantly eased supply disruption fears. According to U.S. officials speaking to NBC News, Israel confirmed it would not target Iran's oil infrastructure, shifting traders' focus back to fundamental market factors.
This decline in oil prices comes after weeks of volatility in energy markets driven by geopolitical tensions in the Middle East. Concerns that the conflict between Israel and Iran could escalate and disrupt a region critical to global oil production had temporarily pushed prices higher. "Weakening demand has led to traders withdrawing the 'war premium' from prices," noted Priyanka Sachdeva, a senior market analyst at Phillip Nova.
Beyond the easing of geopolitical tensions, a weakening demand outlook is also weighing heavily on oil markets. The Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) both downgraded their forecasts for global oil demand growth in 2024. According to the IEA's latest report, global demand is expected to increase by only 900,000 barrels per day (bpd) in 2024, a significant slowdown compared to the post-pandemic recovery period, where demand surged by 2 million bpd.
The drop in Chinese oil demand has been a key driver of the demand downgrades. The IEA reported that China's consumption fell by 500,000 bpd in August, marking the fourth consecutive month of decline. This weak demand from China, the world's largest importer of crude oil, has added to broader concerns about the global economic outlook and its impact on energy markets.
At the same time, supply levels have remained relatively stable, further pressuring prices. The IEA indicated that oil production in the Americas, led by the U.S., is expected to grow by 1.5 million bpd this year and next, adding to global supply. This supply growth, combined with faltering demand, is leading to predictions of a significant surplus in the oil market heading into 2024. "For now, supply keeps flowing, and in the absence of a major disruption, the market is faced with a sizeable surplus in the new year," the IEA said in its report.
As a result, oil prices have pulled back considerably from the highs seen earlier this month, when fears of a potential Israeli strike on Iran's oil facilities caused a temporary spike. Brent crude and WTI are both down roughly 4% year-to-date, with this week's declines nearly wiping out the gains made following Iran's October 1 attack.
In addition to the Middle East concerns, the broader outlook for the global economy is also weighing on oil demand. With economic growth slowing in major markets like China and Europe, the appetite for energy is diminishing. This has led analysts to adjust their expectations for oil prices in the near term. "Without geopolitics in the equation, oil would have tumbled even more, maybe even below $70 per barrel," Sachdeva added.
The oil market has been further pressured by OPEC's decision to reduce its forecast for 2024 oil demand growth for the third consecutive month. The cartel, which plays a crucial role in stabilizing global oil prices through production adjustments, is now forecasting slower growth in consumption due to weaker-than-expected economic performance in key markets. China's economic struggles, in particular, have played a large role in this revision.
Meanwhile, the IEA has sought to reassure the market that its members are prepared to respond to any potential supply disruptions in the Middle East. In its monthly report, the agency stated that it would be ready to take action should the situation in the region deteriorate further. However, with Israel currently refraining from targeting Iran's oil infrastructure, such intervention may not be necessary in the near term.
