Lsat week has seen significant volatility in global oil markets, driven by both geopolitical tensions and weakening economic fundamentals. Despite a soft start to the week with lower oil prices, the markets experienced a sharp spike of nearly four percent following high-profile assassinations in the Middle East.
Geopolitical Impact
On Wednesday, oil prices surged after the killing of Hamas leader Ismail Haniyeh in Tehran. This assassination followed the earlier killing of a senior Hezbollah commander in Beirut, escalating regional tensions and raising concerns about potential disruptions to oil supplies from this critical region. The death of Haniyeh, who was attending the inauguration of the new Iranian president, was attributed by Iranian officials and Hamas to Israel. The U.S. also indicated that Israeli strikes were responsible for the deaths of both Haniyeh and Hezbollah commander Fuad Shukr.
The geopolitical situation intensified further when Iranian Supreme Leader Ayatollah Ali Khamenei reportedly ordered a direct strike on Israel in retaliation. This declaration heightened fears that the ongoing Palestine-Israel conflict could expand into a broader regional war, potentially disrupting oil supplies and driving prices higher. Brent crude prices briefly topped $81 per barrel, while West Texas Intermediate (WTI) approached $79 per barrel.
Market Reaction and Trends
However, the anticipated retaliatory strikes from Iran did not materialize, leading to a significant decline in the geopolitical premium on oil prices. By Friday, oil prices had slumped to their lowest levels in nearly seven months. Brent crude fell 3.4% to settle below $77 per barrel, its lowest price since early January. Brent crude for October delivery dropped to $76.81 per barrel, while benchmark U.S. crude for September delivery fell to $73.52 per barrel. Both benchmarks recorded over 7% losses over the past four weeks, marking the longest streak of weekly declines this year.
Economic Fundamentals and Demand Concerns
The decline in oil prices has been driven by weakening fundamentals overshadowing the geopolitical risks. John Kilduff from Again Capital noted that the market quickly transitioned from a period of geopolitical concern to one dominated by economic data. Tim Snyder from Matador Economics added that the brief spike in prices was short-lived, with a subsequent nosedive as economic concerns took precedence.
Concerns about deteriorating demand, particularly from China—the world’s largest crude importer—and the U.S., have contributed to the decline. Data from July indicated a significant drop in China’s fuel oil imports by 11% in the first half of 2024, exacerbating worries about global demand. Additionally, falling manufacturing activity in China and weak economic data from Asia, Europe, and the U.S. have further weighed on oil prices.
OPEC and Supply Dynamics
On the supply side, the Organisation of the Petroleum Exporting Countries (OPEC) is set to increase production starting next quarter, although it has indicated that supply hikes can be adjusted as needed. Analysts like Ashley Kelty from Panmure Liberum suggest that weak economic growth could suppress oil demand despite heightened regional tensions.
Outlook
The rapid downgrading of the geopolitical premium and persistent weakness in oil fundamentals suggest that even potential geopolitical events may not significantly impact oil prices in the long term. For consumers in countries like Pakistan, where indirect taxes on petroleum products are a primary revenue source, the impact on petrol prices remains a complex issue, influenced by both global market trends and domestic fiscal policies.
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