Oil prices rebounded on Thursday following a significant retreat midweek, as traders recalibrated their positions amidst escalating tensions in the Middle East and mixed signals on global market fundamentals. Brent crude futures edged higher toward $76 per barrel, while West Texas Intermediate (WTI) crude hovered near $72 per barrel. Both benchmarks had experienced a notable drop on Wednesday, triggered by rising US crude inventories and concerns over future supply-demand balances.
The geopolitical situation in the Middle East, a region responsible for approximately one-third of the world’s oil production, remains a key driver of oil market volatility. US Secretary of State Antony Blinken held discussions with Saudi Crown Prince Mohammed bin Salman in Riyadh as part of the Biden administration’s diplomatic efforts to broker a cease-fire in the Gaza Strip and Lebanon. Blinken’s earlier visit to Israel underscored the heightened regional risks after Israel threatened retaliatory strikes against Iran following a missile attack in early October.
The Middle East has long been a fulcrum of global oil market dynamics, with any conflict in the region sending ripples through the energy markets. Traders remain focused on the possibility of broader regional escalation, which could further disrupt supply from key oil-producing countries like Saudi Arabia, Iraq, and Iran. The prospect of instability remains heightened by the conflict in Gaza, renewed tensions in Lebanon, and ongoing US-Iran hostilities.
Saudi Arabia, the world’s largest oil exporter, is of particular significance. Any disruption to its oil output would severely strain global supply chains, leading to significant upward pressure on prices. While diplomatic channels remain open, the failure to reach a lasting ceasefire in Gaza or prevent further hostilities between Israel and Iran could prompt traders to anticipate a prolonged period of instability, pushing prices even higher.
According to Vandana Hari, founder of Vanda Insights in Singapore, geopolitical factors and the broader economic outlook have taken center stage. “Mideast tensions and the economic outlook — as a proxy for global oil demand — are the key drivers,” said Hari. “Neither is sending any strong signals at the moment, and crude may remain broadly rangebound until that situation changes.”
Even as Middle Eastern geopolitical risks dominate headlines, the oil market is grappling with conflicting signals on global demand. The world’s largest oil importer, China, continues to struggle with sluggish economic growth. Despite the Chinese government’s efforts to stimulate the economy with fiscal measures and monetary easing, demand for crude oil has faltered. Weaker-than-expected industrial output and declining consumer confidence in China have tempered the once-robust appetite for crude, casting doubts over its ability to drive global demand growth.
In contrast, the US, the world’s largest oil consumer, has shown signs of strength. Refinery processing rates in the US are running at a six-year seasonal high, as refiners take advantage of healthy margins driven by solid domestic demand for gasoline and diesel. These strong processing rates suggest that US oil consumption may help offset some of the demand weakness seen in China and other parts of the world.
However, the looming US presidential election, set for November, adds another layer of uncertainty to the market. Investors are wary of the potential policy shifts that could follow the closely contested election, particularly on issues related to energy regulation, sanctions, and the US’s stance toward the Middle East.
Traders and investors have responded to the rising geopolitical risks and mixed demand outlook by turning to oil options contracts to hedge against potential price spikes. This week, Brent options open interest surged to more than 4 million contracts, marking a new record. These contracts, equivalent to 4 billion barrels of oil, highlight the growing concern among traders about the possibility of a significant supply disruption in the Middle East.
Options trading has become an essential tool for market participants seeking to protect themselves from sudden price movements. In periods of heightened uncertainty, the demand for options increases, as these financial instruments provide a form of insurance against unpredictable swings in the price of crude. By holding options contracts, traders can mitigate the risk of a price surge triggered by supply disruptions, such as a possible closure of the Strait of Hormuz — a critical chokepoint for global oil shipments.
While speculation has driven part of the recent increase in options trading, the sheer volume of contracts indicates that market participants are preparing for a volatile period ahead. As long as tensions in the Middle East remain unresolved, traders will likely continue to hold onto these contracts as a hedge against unforeseen disruptions.
Adding to the bearish sentiment earlier this week was the latest data on US crude inventories, which showed a significant build of more than 5 million barrels. The increase in stockpiles suggests that US crude production, already at record levels, is outpacing demand. The US Energy Information Administration (EIA) reported that domestic production has surged to new highs, driven by robust output from shale plays in Texas and New Mexico.
This rise in US production comes at a time when global supply chains appear increasingly strained. The International Energy Agency (IEA) warned that the world could face an oil glut in 2025, as both the US and OPEC+ — the group of major oil-producing nations led by Saudi Arabia and Russia — maintain substantial spare capacity. OPEC+, in particular, has managed its output carefully in recent years, cutting production to keep prices stable even as global demand wavered during the COVID-19 pandemic.
However, the prospect of a supply glut in the coming years presents a complex challenge for oil producers. On the one hand, maintaining high levels of output could help meet demand and stabilize prices in the short term. On the other hand, excessive production without corresponding demand growth could push prices lower, straining the budgets of oil-dependent economies, especially in the Middle East.
The OPEC+ alliance has played a crucial role in shaping oil market outcomes over the past decade. The group has demonstrated its ability to respond to crises, cutting production when needed to prevent a collapse in prices, as seen during the height of the COVID-19 pandemic. More recently, OPEC+ has worked to stabilize the market by adjusting output in response to fluctuating demand, particularly from China and the US.
The challenge for OPEC+ moving forward is balancing the need to manage supply against the risk of overproduction. Saudi Arabia, which holds the largest spare capacity within the group, has been a key player in this balancing act. As the de facto leader of OPEC+, Saudi Arabia has often been willing to cut production to prop up prices, even at the expense of short-term revenue losses.
The broader geopolitical landscape, however, could complicate OPEC+ decision-making. Tensions between Saudi Arabia and Iran, two of the group’s most influential members, threaten to disrupt cooperation within the alliance. Furthermore, Russia’s role in OPEC+ has become more precarious following the invasion of Ukraine and subsequent Western sanctions. While Russia continues to export oil, its ability to influence the market has diminished due to its isolation from many global financial markets.
