Demand worries amid economic recession fears dragged down oil prices, but losses were limited due to the potential loss of supplies from the Middle East and an unexpected drawdown in US crude inventories.The Asian benchmark Brent crude dropped to a low of $75.05 a barrel last week, its lowest level since January. A similar selloff was witnessed in the US WTI and domestic futures prices as well.
Recent global economic releases from the US, China and Europe fell short of investor expectations, raising the risk of a sluggish global economy which would weigh the demand for oil.
In the US, unemployment numbers surged for the fourth straight month in July to hit a near three-year high. In addition, the latest manufacturing numbers from the country were also dismal, raising worries that the world’s largest economy is vulnerable to a recession.
The US is the world’s largest producer of crude oil, but inventories from the country have been falling at a faster-than-usual pace this summer. At the end of July, US crude stocks had fallen for five consecutive weeks by 3.4 million barrels, which was larger than predicted earlier.
Meanwhile, the US Energy Information Administration forecast demand balances for US oil markets this year, although there are chances for supply tightness. The agency expects US oil demand for 2024 would be 20.5 million bpd, slightly higher than the previous year, while output is likely to grow to fresh record highs this year.
Oil imports and refinery activity numbers from China are currently running at low levels. Refineries are cutting back production amid weak economic growth and housing crisis that deteriorated oil demand in construction areas. Falling manufacturing activity in the country also inhibited the prices.
China’s oil imports dropped to 9.97 million bpd in July, the lowest in nearly two years. In the first seven months of 2024 oil imports to the country dropped by 2.9 percent compared to the same period last year.
Global oil prices have seen volatility broadly inside $92-72 a barrel throughout this year. The ongoing geopolitical uncertainty and OPEC Plus production policies have thoroughly affected the price outlook.
The war between Israel and Hamas has been affecting the geopolitical dynamic in the Middle East for many months. However, these tensions further escalated recently after Iran vowed retaliation following the assassinations of a Hamas chief in Tehran and a senior military commander from the Lebanese group Hezbollah.
In June, the OPEC Plus cartel decided to extend most of its deep oil production cuts into 2025 to shore up the market amid tepid demand growth. The combined output cut of the production group is estimated at 5.7 percent of the worldwide oil demand.
The present global supply-demand dynamics are balanced, and hence the price outlook remains steady. However, further escalation of tensions in the Middle East would increase the region’s instability, which could pose adverse effects on the oil supply chain that may trigger speculative price waves. Amid the tepid global growth outlook, there are chances that central banks may cut interest rates, which could shore up demand optimism later.
(The author is Head of Commodities, Geojit Financial Services)