Oil prices rose more than 1% on Tuesday, rebounding after the sharpest drop in two years the previous day, as a U.S. government plan to purchase crude oil for its Strategic Petroleum Reserve (SPR) offered a measure of market support. Brent crude futures increased by 94 cents, or 1.32%, reaching $72.36 a barrel, while U.S. West Texas Intermediate (WTI) crude gained 98 cents, or 1.45%, to $68.36 a barrel by midday trading.

The recovery came after a 6% drop in both contracts on Monday, their steepest decline since October 1, triggered by investor concerns over weakening global oil demand. Monday's fall was partly driven by Israel's limited retaliatory strike against Iran over the weekend, which notably spared Iran's oil and nuclear facilities, calming fears of major supply disruptions in the region. With tensions seemingly contained for now, attention has shifted back to broader concerns, particularly sluggish economic activity in China.

China, the world's largest oil importer, has seen industrial profits slump, dampening global demand for crude oil. Murray Auchincloss, CEO of BP, emphasized that China's sluggish economic performance has been a significant drag on global oil consumption. "Global refining margins are dismal as oil demand growth remains below average due to China's slowing economy," Auchincloss said, adding that demand could recover once President Xi Jinping's stimulus measures take effect.

Harry Tchilinguirian, head of research at Onyx Capital Group, echoed these sentiments. "Following Israel's retaliation, the event risk has faded, leaving the oil market to face up to macroeconomic realities," he said. "China, where industrial profits are slumping, will be front and center in shaping global demand in the coming months."

Despite these broader concerns, some support came from the United States, which announced plans to purchase up to 3 million barrels of oil for the SPR for delivery through May 2024. While the quantity may be limited, the introduction of a fundamental buyer like the U.S. government provided a modest lift to prices. PVM analyst John Evans pointed out that the SPR purchase injected some optimism into the market but cautioned that it might not be enough to counter the overall pessimism about demand from China and Europe.

Goldman Sachs remains cautiously optimistic, forecasting that Brent crude could recover to $77 per barrel by the fourth quarter of 2024, even without any significant supply disruptions in the Middle East. However, Goldman analysts have warned that risks remain skewed to the downside going into 2025. According to Daan Struyven, a Goldman analyst, the combination of weak Chinese demand, robust U.S. production, and OPEC+ plans to reintroduce crude to the market in December could suppress prices.

In the meantime, oil traders are closely monitoring U.S. stockpile data. Preliminary polls suggest crude oil and gasoline inventories likely increased last week, while distillate stocks may have declined. The American Petroleum Institute (API) is set to release its weekly report on Tuesday, followed by the U.S. Energy Information Administration (EIA) report on Wednesday.

Energy traders were also reacting to updated market prices. On Tuesday, the WTI December contract was trading at $68.27 per barrel, up 89 cents, while Brent's December contract was priced at $72.34, up 92 cents. Despite the day's gains, U.S. crude oil is down nearly 5% year-to-date, while Brent has declined more than 6%. RBOB Gasoline November contracts rose by 0.84% to $1.9829 per gallon, and natural gas prices fell 4.29% to $2.21 per thousand cubic feet, down about 12% year-to-date.

While geopolitical tensions in the Middle East remain high, the market seems to be adjusting to the possibility that supply disruptions from the region may not materialize, at least in the near term. Iranian Foreign Ministry spokesperson Esmaeil Baghaei warned on Monday that Iran would "use all available tools" in response to Israel's attack, though immediate escalations appear unlikely.

However, analysts continue to point to other risks that could impact the market. With OPEC+ poised to increase production in December and ongoing uncertainty about Chinese economic recovery, the oil market remains on shaky ground. Struyven noted that while short-term prices may rise due to strategic purchases and potential airline demand recovery, the long-term outlook is less certain due to a soft demand environment and robust supply levels.