Oil prices edged higher on Wednesday, attempting to stabilize after a sharp two-day decline. The rebound comes as traders weigh developments in the Middle East and the impact of dwindling U.S. crude stockpiles, against a backdrop of global supply concerns and shaky demand projections. Brent crude rose toward $72 a barrel after a recent slump of more than 6%, while West Texas Intermediate (WTI) hovered near $68. This recovery is taking place amid ongoing concerns surrounding the Israel-Hezbollah conflict and possible escalations involving Iran, a key OPEC producer.
In recent days, oil markets have been influenced by conflicting signals from the Middle East. Israel's military chief vowed to retaliate against Iran if it launches another attack, while Israeli ministers suggested that the war with Hezbollah could end by year's end. Standard Chartered analysts emphasized in a note that the market may have "relaxed too quickly" regarding the geopolitical tensions, pointing out the potential for "an escalating series of attacks" with no imminent military or diplomatic resolution in sight.
While geopolitical risks have kept oil traders on edge, the focus is gradually shifting back to the fundamentals of supply and demand. Expectations of a weak demand outlook, particularly from China-the world's largest crude importer-have tempered market enthusiasm. China's sluggish economy and uncertain recovery prospects are raising concerns about a potential oversupply in global oil markets.
OPEC+ remains in focus as well. The group, which includes key oil-producing nations, is scheduled to begin unwinding production cuts in December. However, traders are divided on whether the alliance will proceed with the planned production ramp-up, especially given the current uncertainties in the market. In this context, the market is also closely monitoring upcoming U.S. economic and political events, including the 2024 presidential election and potential Chinese economic stimulus measures.
Adding to the price fluctuations are recent developments in U.S. crude inventories. The American Petroleum Institute (API) reported that U.S. crude stockpiles unexpectedly fell by 573,000 barrels last week, a figure lower than the anticipated rise of 2.3 million barrels. This unexpected decline raised concerns over possible supply constraints, driving oil prices higher. Official data from the U.S. Energy Information Administration (EIA), due later this week, is expected to shed more light on the situation. Analysts predict a rise of 800,000 barrels in domestic crude supplies for the week ending October 25, along with declines in gasoline and distillate inventories.
The oil market's attempts to recover come after both WTI and Brent futures ended Tuesday's session at seven-week lows. Analysts attributed the decline to easing concerns about the Israel-Hezbollah conflict after reports surfaced suggesting that Israeli Prime Minister Benjamin Netanyahu was considering diplomatic approaches to resolve the fighting. This led to diminished geopolitical risk premiums, with oil prices plunging more than 6% on Monday following Israeli airstrikes on Iran that avoided energy infrastructure.
However, even with diminishing geopolitical concerns, other factors continue to weigh on the oil market. The demand outlook remains a significant concern, particularly with doubts about China's economic strength and OPEC+ plans to lift production. Additionally, there are growing fears of a surplus in the global physical market as supply outpaces demand.
"Geopolitical uncertainty surrounding Israel's ongoing fight with Iranian proxy groups is likely the sole reason WTI crude has held above key technical support levels between $67 and $69 per barrel," wrote analysts at Sevens Report Research. They noted that beyond geopolitical factors, the fundamental outlook for oil is deteriorating as concerns about an emerging global surplus grow.