Oil prices fall as reality of weak global demand overtakes risk of wider Mideast war

Global oil prices are falling sharply after a retaliatory strike by Israel over the weekend targeted Iranian military sites, rather than its energy infrastructure as had been feared.

Prices for crude spiked globally on October 2 after Iran fired nearly 200 missiles into Israel, part of a series of rapidly escalating attacks between Israel and Iran, and its Arab allies, that threatened to push the Middle East closer to a regionwide war.

Iran is the world’s seventh-largest oil producer, but a wider conflict in the Middle East could have an impact for some of the world’s largest energy producers in the region.

With many seeing that threat diminishing, at least in the near term, the price of benchmark US crude and Brent crude, the international benchmark, tumbled six per cent on Monday. US crude fell well below US$70 per barrel.

The Israeli military said its aircraft targeted facilities that Iran used to make the missiles fired at Israel as well as surface-to-air missile sites.

Here’s a look at the current situation and the outlook for oil and gas prices:

The price for US benchmark crude tumbled on Monday after a weekend retaliatory strike by Israel on Iran targeted military sites, rather than the oilfields of the world’s seventh largest producer of crude.

That puts the price of a barrel of US crude well under US$70 after it jumped above US$77 earlier this month. Oil and gasolene prices are each down sharply from their yearly highs in April. A gallon of gas at more than half the pumps in the US can be had for less than US$3, according to energy analysts.

Focus has returned to the fundamentals of global energy markets, which this year has been a story of ample supply and falling demand. A chief driver is slowing economic growth in China, a massive energy consumer.

Beijing said this month that China’s economy expanded at an annual rate of 4.6 per cent in the July-September quarter, down from 4.7 per cent annual growth in the previous quarter and short of the official target of “about 5 per cent” growth for 2024.

Middle East conflict is still roiling energy markets, just not as much.

Prices surged briefly this month after Iran sent missiles into Israel, but many experts see the Israeli response over the weekend as measured, potentially ending a cycle of retaliatory strikes from each side, at least for now.

And the OPEC+ alliance, made up of members of the producers cartel and allied countries, including Russia, have less sway over global prices than, say, the 1970s, when an oil embargo that followed the start of the Yom Kippur war in 1973 quadrupled oil prices.

The global supply of oil has been altered radically since then, with the US becoming the world’s largest oil producer. Months of war between Israel and Hamas and Hezbollah, two Iranian proxies, did little to boost prices for OPEC and its 12 oil-producing nations. Only the possibility of a direct confrontation between Israel and Iran moved the needle.

It’s the fundamentals

The long-term expectation is for oil prices to move lower, not higher. That’s because the balance between supply and demand has tilted towards supply, a dynamic that typically deflates oil prices.

In its most recent update on the energy markets, the International Energy Agency said demand for oil in the first half of this year rose by the smallest amount since 2020. Meanwhile, supplies have continued to increase, and the OPEC+ alliance has said it plans to release more oil into the market, starting in December.

What is going on with energy prices this year?

Oil futures rose quickly to start the year and hit US$85 per barrel in April, but it’s been almost all downhill from there, and prices at the pump are following along.

US gas prices loosely follow crude because the price of oil makes up half the cost of a gallon of gasolene. Between Friday and Monday, during which Israel launched a measured counterstrike in Iran, the price for a barrel of oil tumbled by US$4.

OPEC has tried to establish a floor for oil prices this year with little success.

Saudi Arabia and allied oil-producing countries in June extended production cuts into next year, hoping to support slack prices that haven’t rebounded even amid turmoil in the Middle East and this year’s summer travel season.

At the same time, the United States is pumping unprecedented volumes of crude. The US Energy Information Administration expects average daily crude oil production in the United States this year will be 13.2 million barrels per day, and it only expects that production to grow in 2025.

What’s next for oil and gasolene prices?

A number of energy experts believe that oil prices have peaked this year and will continue to erode, likely meaning more breaks for motorists.

“Limited nature of Israeli strikes against Iran should diminish fears of wider war and shave some of the geopolitical premium on crude oil,” said Tom Kloza, global head of energy analysis with the Oil Price Information Service on a social media post over the weekend. “Today’s US retail gas avg is US$3.13/gal, with 55 per cent of sites priced at less than US$3/gal.”

Kloza told the AP this month that 2025 looks even worse for oil producers, “with supply almost certainly outpacing demand by 500,000 to one million barrels a day”.

Gasolene prices in the United States are already in retreat with a week remaining before the US presidential election.

The national average price of US$3.13 per gallon is down more than 4 cents from last week and it’s down a whopping 37 cents per gallon from last year at this time, according to auto club AAA.

In many states, however, prices are far below the national figure. The average price for a gallon in Texas is US$2.67 and it’s close to that in many Southern States. Prices in western states are much higher, including close to US$4.60 in California.

AP