Crude oil prices made substantial gains last week due to widening conflicts in the Middle East. The geopolitical tensions that began a year ago between Hamas in Palestine and Israel have now expanded into a full-fledged regional war, involving Iran, Lebanon, and Syria, and others. The United Nations-designated terrorist organisation Hezbollah has taken a center stage in the conflict with antipathy reaching new heights. However, the gains were limited by weak demand projections from the International Energy Agency (IEA) in China, the world’s second-largest economy, due to a nationwide economic downturn.
Data compiled by Polymerupdate Research showed, the benchmark Brent crude futures for near-month delivery on the InterContinental Exchange (ICE) jumped 8.43 percent last week due to supply fears from the Middle East. Brent crude futures began its journey from US$ 71.98 a barrel and ended the week at US$ 78.05 a barrel, the highest level since August 31, 2024. Similarly, the Western Texas Intermediate (WTI) futures for near month delivery gained over 9 percent to last week at US$ 74.38 a barrel, a weekly gain of US$ 6.20 a barrel, from US$ 68.18 a barrel on previous Friday. The current level of WTI futures was not seen after August 29, 2024.
According to reports, the United States President Joe Biden was considering attacking the energy production and storage facilities in Iran, in a retaliatory action over Tehran’s missile attacks on Tel Aviv. While addressing the United Nations General Assembly gathering, Israel’s Prime Minister Benjamin Netanyahu vowed to respond to Iran's attack. Experts believe that the Iron Dome, an Israeli mobile all-weather air defense system, has kept Iran’s crude oil facilities on the top of the hit list.
“Crude oil prices experienced significant recovery last week from their lows to reach five-week highs, driven by heightened tensions in the Middle East and better-than-expected U.S. non-farm payroll data. Israel's military actions against Lebanon and its threats of retaliation against Iran in response to missile attacks on Israel have further unsettled global oil markets. Additionally, crude oil prices gained support from the positive US economic data, including the non-farm payroll and the unemployment rate. The reopening of Chinese markets this week, combined with recent stimulus measures, is expected to boost China's oil demand, providing further support to prices,” said Rahul Kalantri, Vice President-Commodities at Mehta Equities Ltd.
Goldman Sachs’ estimatesThe American multinational investment bank and financial services company, Goldman Sachs, has estimated crude oil prices to shoot up by US$20 a barrel from the current level, in case the supply from Iranian oil facilities see a halt due to a possible strike from the United States and Israel, as threatened by them. “If you were to see a sustained 1 million bpd drop in Iranian production, then you would see a peak boost to oil prices next year of around US$ 20 a barrel,” said Daan Struyven, Co-head of Global Commodities Research at Goldman Sachs.
The Goldman Sachs’ commodities analyst forecasted this while assuming that oil cartel OPEC+ refraining from responding by increasing production. “Should key OPEC+ members such as Saudi Arabia and the United Arab Emirates (UAE) could see a smaller boost of slightly less than US$ 10 a barrel,” he added.
It is worth noting that the oil market has seen limited disruptions since the Israel-Hamas armed conflict began on October 7, 2023. Crude oil prices remained under pressure due to frequent interventions with production increase from non-OPEC+ countries including the United States, and allied nations, followed by sluggish demand from China on economic worries. With around 4 percent of market share in the world crude oil supply, Iran accounts for over 4 million bpd of global output.
Continuing demand weakness in ChinaBoth Brent crude and WTI Cushing posted losses for three consecutive months until September 2024 as the U.S. and Chinese demand concerns outweigh recent disruptions in Libyan oil supply amid a dispute between government factions there and the tensions in the key Middle East producing region related to the Israel-Gaza conflict. Oil exports from Libya were temporarily suspended. By contrast, the Arabian Gulf Oil Company has resumed output at up to 120,000 bpd to meet domestic needs, after the standoff between the factions shut most of the country’s oilfields.
Meanwhile, pessimism about Chinese demand growth re-surfaced after an official survey showed manufacturing activity in the world’s second biggest economy sinking to a six-month low in August, and this trend is expected to continue in September. Factory gate prices tumbled in China and owners struggled for orders, although another survey tracking export-oriented companies showed signs of a tentative recovery in August. China’s central bank recently cut its key interest rate by 50 basis points (bps) and announced a large stimulus package to boost the economy.
IEA forecasts deceleration in world demandInternational Energy Agency (IEA) in its July 2024 Oil Market Report forecasts world oil demand continues to decelerate, with 2Q24 growth easing to 710,000 bpd year-on-year – the slowest quarterly increase since the October-December 2022 quarter. Chinese consumption contracted, as the country's post-pandemic rebound has run its course. Global gains are forecast to average just below 1 million bpd in 2024 and 2025, as subpar economic growth, greater efficiencies and vehicle electrification act as headwinds.
Also, global crude oil supply rose by 150,000 bpd to 102.9 million bpd in June as field maintenance eased and biofuels rose, offsetting a significant drop in Saudi flows. Solid monthly gains pushed April-June 2024 quarter output 910,000 bpd higher q-o-q. Growth of 770,000 bpd is seen for July-September 2024 with non-OPEC+ providing 600,000 bpd of the gains. Annual increases of 770,000 bpd are forecast in 2024 with gains of 1.8 million bpd next year.
DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
