Key points:

  • OPEC has revised downward its forecast for Chinese oil demand for 2024.
  • A strong dollar could hurt demand for oil denominated in that currency.
  • The latest US steps to strengthen Israel’s security have reduced the risk of a full-scale conflict.

As of Monday, oil prices have shown a decline of 2%. The reason for this was another downward revision of OPEC’s forecast for global oil demand for both the current and next year. The situation was aggravated by the fact that China’s oil imports have fallen for five consecutive months.

The Chinese government’s recent measures to stimulate the economy have failed to allay investor fears, while markets continued to closely monitor the situation in the Middle East, in particular the possibility of Israeli military action against Iranian oil infrastructure.

As a result of these factors, the cost of Brent crude oil futures fell by $1.58, which corresponds to 2%, and amounted to $77.46 per barrel. Similar dynamics were observed on the WTI crude oil market, where quotes fell by $1.73 or 2.29%, settling at $73.83 per barrel. It should be noted that last week, oil prices demonstrated positive dynamics: the cost of Brent crude oil contracts increased by 99 cents, and WTI crude oil by $1.18.

China’s oil demand may decline again

A reduction in the forecast for oil demand growth in China, the world’s largest importer of “black gold”, was a key factor influencing OPEC’s revision of its global estimates. The organization significantly lowered its forecast for China for 2024, reducing it by 70 thousand barrels per day. Statistics for the first nine months of this year confirmed these concerns: crude oil imports into China fell by almost 3% compared to the same period last year.

Experts say the slowdown in oil demand in China is due to the growing popularity of electric vehicles and the slowdown in economic growth following the COVID-19 pandemic. The situation is aggravated by increasing deflationary pressures in the country, as evidenced by official data for September. A recent press conference on economic stimulus measures did not bring the expected clarity to investors about the scale and timing of these measures.

“The lack of concrete measures to address structural problems such as weak consumption and overreliance on infrastructure investment has only increased market uncertainty,” says Mukesh Sadev, an analyst at Rystad Energy.

Negative news from China outweighed concerns about a possible escalation of the conflict in the Middle East. Although the risk of disruption of oil supplies as a result of Israel’s response to the recent attack by Iran remains, it was Chinese factors that had a more significant impact on the dynamics of oil prices.

The Middle East has retreated into the background

The price of Brent crude oil fell significantly by 5% during over-the-counter trading after information appeared that Israeli Prime Minister Benjamin Netanyahu notified the United States of Israel’s readiness to strike Iranian military facilities. At the same time, the Israeli leader emphasized that this doesn’t concern nuclear or oil facilities.

Reports of a possible escalation of the conflict in the Middle East provoked a drop in oil product prices. Thus, futures for heating oil and gasoline in the United States fell by 5% and more than 4%, respectively.

The situation on the market was further aggravated by OPEC’s decision to lower the forecast for growth in global demand for oil in 2024, as well as to revise downwards the forecast for next year. This is the third consecutive downward revision of forecasts.

Amid geopolitical tensions, the United States has decided to send additional troops and an advanced missile defense system to Israel. According to analysts, such measures can mitigate the possible consequences of an escalation of the conflict.

“Despite the high probability of an Israeli attack on Iran, the recent steps of the United States have probably reduced the risk of a full-scale war in the Middle East,” said Dennis Kissler, senior vice president of trading at BOK Financial.

However, experts note that the ongoing uncertainty will continue to put pressure on the market. “Most fund managers will take a wait-and-see approach,” Kissler emphasizes.

Washington has called on Israel to take a measured approach to retaliatory measures to avoid a wider conflict in the Middle East. US President Joe Biden has publicly expressed opposition to possible strikes on Iranian nuclear facilities and concerns about attacks on Iran’s energy infrastructure.

On Monday, the US dollar reached a nine-week high. The strengthening of the US currency could negatively impact demand for dollar-denominated oil.