Oil prices are set to experience their largest weekly decline in over a month, driven by concerns about weakening global demand, particularly from China, and a reduction in immediate supply risks from the ongoing conflict in the Middle East. As of Friday, Brent crude futures had slipped by 0.44% to $74.12 a barrel, while U.S. West Texas Intermediate (WTI) crude fell by 0.4% to $70.41 a barrel. Both benchmarks are on track for a drop of more than 6% this week, marking the biggest decline since early September.
The sharp downturn in oil prices comes as the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) revised down their forecasts for global oil demand in 2024 and 2025. These updated projections have contributed to concerns that sluggish economic growth, especially in key markets like China, could weigh on future oil consumption.
China, the world's largest oil importer, has shown signs of economic strain, with the country's economy growing at its slowest pace since early 2023 during the third quarter. While industrial output and consumption data for September exceeded expectations, China's refinery output continued to decline for the sixth consecutive month, reflecting weak domestic fuel demand and poor refining margins.
"Positive U.S. economic data has helped alleviate some growth concerns, but market participants continue to monitor potential demand recovery in China following recent stimulus measures," said Hani Abuagla, senior market analyst at XTB MENA. The Chinese central bank has introduced two new funding schemes designed to inject 800 billion yuan ($112.38 billion) into the economy, but it remains to be seen whether this will lead to a sustained improvement in oil demand.
Meanwhile, U.S. economic data has provided some support to crude prices, with figures from the Energy Information Administration (EIA) showing that crude oil, gasoline, and distillate inventories all declined last week. In addition, U.S. retail sales in September rose slightly more than expected, boosting hopes that domestic demand might stay resilient.
Despite these positive signals from the U.S. market, concerns about oil supply disruptions from the Middle East have eased. Fears of a retaliatory strike by Israel on Iran's oil infrastructure-following recent missile attacks and heightened tensions in the region-have diminished for now, contributing to the recent drop in prices. "Fears of an imminent Israeli strike on Iran's energy infrastructure have eased, and this has helped limit the upward pressure on oil prices," said Tamas Varga, an analyst with oil broker PVM.
The geopolitical landscape remains volatile, with ongoing conflicts in Gaza and Lebanon drawing global attention. The death of Hamas leader Yahya Sinwar, killed by Israeli forces, has added another layer of complexity to the Middle East situation. While President Joe Biden and other Western leaders have renewed calls for a ceasefire, Israeli Prime Minister Benjamin Netanyahu has insisted that military operations will continue until all hostages are freed.
Hezbollah, the Lebanese militant group backed by Iran, responded to Sinwar's killing by announcing a "new and escalating phase" in its confrontation with Israel. The group vowed to intensify attacks, leading some market participants to remain cautious about potential supply shocks from the region. "Although the U.S. would like to believe that the killing of the leader is an opportunity to resume serious and meaningful peace talks, it seems more like wishful thinking than a realistic alternative," Varga added.
Looking forward, analysts remain divided on the future direction of oil prices. While U.S. economic resilience and potential improvements in Chinese demand could provide some support, the longer-term outlook is clouded by the prospect of rising global oil supplies. The IEA has forecast that supply could outpace demand by 2025, creating a surplus that could weigh on prices.
Despite the short-term dip, some market watchers suggest that oil prices could see a rebound if Middle East tensions escalate or if demand surprises to the upside. "An upside correction cannot be ruled out, but this market is unlikely to scale previous summits," Varga noted, emphasizing the delicate balance between supply and demand dynamics.
