Oil Prices Crash 4%: Iran Tensions Ease and Global Demand Fades

Oil prices took a significant hit on Tuesday, dropping more than 4% and reaching their lowest levels in nearly two weeks. The plunge comes as concerns over supply disruptions from Iran began to ease, and a weakening global demand outlook further weighed on the market. This double blow caused both Brent crude and West Texas Intermediate (WTI) to tumble, erasing nearly all of the gains made in the previous weeks.

Brent and WTI Futures Fall Sharply

At 1312 GMT, Brent crude futures fell by $3.29, or 4.3%, to $74.17 a barrel, while WTI futures dropped by $3.38, or 4.6%, to $70.45 per barrel. Earlier in the day, both benchmarks had fallen even further by $4, reaching their lowest points since early October. This steep decline followed a 2% drop on Monday, driven by mounting concerns over a weakening demand narrative.

The market has been jittery in recent weeks due to fears that Israel could target Iranian oil facilities following the latter's missile attacks. However, reports suggesting that Israel would focus its military actions on Iranian military targets rather than oil infrastructure have calmed some of those fears, leading to the sharp pullback in prices.

Israel-Iran Tensions: Reduced Fear of Supply Disruption

One of the key drivers behind the recent decline in oil prices is the easing of concerns about potential disruptions to Iranian oil supplies. On Monday, the Washington Post reported that Israeli Prime Minister Benjamin Netanyahu had informed the United States that Israel was prepared to strike Iranian military targets, but not nuclear or oil facilities. This news alleviated market fears that Israeli retaliation could disrupt oil flows from the region, which had initially led to a “war premium” on oil prices.

Israel has continued its military operations against Hezbollah militants in Lebanon, with expanded airstrikes killing at least 21 people in northern Lebanon. Despite the geopolitical tensions in the region, the market has started to price in less risk of an immediate disruption to oil supplies, contributing to the sharp drop in crude prices.

Oil Prices Crash 4%: Iran Tensions Ease and Global Demand Fades

Oil Prices Crash 4%: Iran Tensions Ease and Global Demand Fades

Weakening Global Oil Demand Outlook

Adding to the bearish momentum, a weaker global demand outlook has placed additional pressure on oil prices. Both the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) revised down their forecasts for global oil demand growth in 2024. The cuts were primarily driven by economic slowdowns in China, the world’s largest importer of crude oil.

China’s September oil imports fell compared to the same period last year, highlighting a drop in demand as the country’s economic growth continues to struggle. A recent poll by Reuters also indicated that China’s economic growth is likely to fall short of Beijing’s targets for 2024. This weakening demand from a major player like China has heightened concerns about the overall global demand outlook.

Priyanka Sachdeva, senior market analyst at Phillip Nova, noted, “Weakening demand has led to traders withdrawing the 'war premium' from prices. However, geopolitics still continues to support oil at this level. Without geopolitics in the equation, oil would have tumbled even more, maybe even below the $70 per barrel mark amid the current weakening demand narrative.”

OPEC vs. IEA Demand Forecasts

While both OPEC and the IEA have downgraded their expectations for global oil demand in 2024, their forecasts remain somewhat divergent. OPEC has projected stronger demand growth than the IEA, though it has also made a series of downward revisions in recent months. John Evans, an oil broker at PVM, pointed out that OPEC’s "run of lower adjustments is something of an admission of wish

Sources:

Reuters

Washington Post

Phillip Nova

Organization of the Petroleum Exporting Countries (OPEC)

International Energy Agency (IEA)

PVM Oil Associates