Asian trade on Thursday, oil prices rebounded slightly, reversing some of the sharp losses seen in the previous two sessions. This rally came after surprising industry data revealed an unexpected drop in U.S. crude oil stockpiles, countering broader market trends that have weighed heavily on crude prices throughout the week.
Brent crude futures rose 45 cents, or 0.6%, to $74.67 per barrel by 0023 GMT. Similarly, U.S. West Texas Intermediate (WTI) crude futures also climbed by 45 cents, or 0.6%, to reach $70.84 per barrel. These gains came after both benchmarks posted significant losses on Wednesday, closing at their lowest levels since October 2. This week’s downward pressure has pushed Brent and WTI prices down by 6-7%, marking a tough week for the oil markets.
Factors Driving the Decline: Demand Forecasts and Geopolitical Risks
The recent slump in crude prices can be attributed to several key factors. First, major revisions to global demand forecasts by both the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) have created downward pressure on prices. Both organizations cut their global oil demand growth estimates for 2024 and 2025, painting a more subdued picture of the energy markets in the years ahead.
OPEC, which plays a critical role in regulating global oil supply, expressed concerns about slower-than-expected economic recovery in major economies like China, the world’s largest importer of crude oil. The IEA, in its October report, echoed these concerns, citing the global economic slowdown, geopolitical uncertainties, and the increasing adoption of renewable energy sources as reasons for the weaker demand outlook.
Adding to this is the easing of geopolitical risk premiums, which had previously bolstered oil prices. The conflict between Israel and Hamas initially raised concerns about a broader regional conflict, particularly regarding Iran, a major oil producer. However, fears of immediate supply disruptions have subsided as Israel has refrained from launching any direct retaliatory attacks on Iran, at least for now.
Nevertheless, tensions remain high in the Middle East, a region that accounts for a significant portion of global oil production. “We are now playing a waiting game for two things. Firstly, the China NPC [National People’s Congress] Standing Committee to flesh out the details and size of the fiscal stimulus package which I believe is coming,” noted Tony Sycamore, an IG market analyst based in Sydney. “The second is Israel’s response to Iran. It’s coming, we know that, but we don’t know when.”
Despite the broader bearish sentiment, the oil market received a boost from the latest American Petroleum Institute (API) data, which showed an unexpected drop in U.S. crude stockpiles for the week ending October 11. According to market sources who spoke on condition of anonymity, U.S. crude stocks fell by 1.58 million barrels, defying analyst expectations of a buildup. Gasoline inventories also plummeted by 5.93 million barrels, while distillate stocks, which include diesel and heating oil, fell by 2.67 million barrels.
This data stands in stark contrast to the predictions of analysts polled by Reuters, who had estimated an average increase of 1.8 million barrels in U.S. crude inventories. The surprising decline in inventories signals robust demand for U.S. oil products, even as concerns persist over global demand in the medium term.
“The data was quite surprising given the broader context of a slowing global economy. It points to some resilience in U.S. demand,” said an industry analyst who declined to be named. “But the global picture remains weak, and that’s ultimately going to weigh on prices in the coming months.”
Market participants are now eagerly awaiting the official inventory data from the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy. The EIA is expected to release its report later on Thursday, at 11:00 a.m. EDT (1500 GMT). This data will offer more clarity on U.S. crude stocks and potentially corroborate—or contradict—the API’s figures.
If the EIA data aligns with the API report, it could provide further support for oil prices in the near term. However, if the official numbers show a buildup in inventories, the current rally could quickly unravel, leading to renewed downward pressure on prices.
Another key factor influencing oil markets is the ongoing economic uncertainty in China, the world’s second-largest economy and a major driver of global oil demand. Investors are closely watching Beijing for further details on its plans to revive its sluggish economy. On October 12, Chinese authorities announced broad measures to boost economic growth, including potential fiscal stimulus aimed at infrastructure spending and consumer support.
“The China NPC Standing Committee has announced stimulus plans, but the market is waiting for more concrete details,” noted Sycamore. “Once we know the scale and specifics of the stimulus, we could see a boost to oil demand, which would support higher prices.”
China’s economic woes, driven by a housing market crisis, weak domestic consumption, and sluggish export growth, have raised concerns about the sustainability of its demand for crude oil. A significant economic slowdown in China would reduce its need for energy, thereby adding further downward pressure on global oil prices.
However, the anticipated stimulus measures could provide a lifeline for the Chinese economy, restoring confidence in its demand for oil and other commodities. Analysts are cautiously optimistic, with some predicting that any meaningful stimulus from China could help stabilize global oil prices in the months ahead.
In addition to developments in China, the oil market is also being influenced by monetary policy decisions in Europe. The European Central Bank (ECB) is expected to cut interest rates again on Thursday, marking the first back-to-back rate cut in 13 years. The ECB’s shift in focus from controlling inflation to protecting economic growth comes amid fears of a recession in the Eurozone, particularly as high energy prices continue to weigh on the region’s economic outlook.
A lower interest rate environment in Europe could weaken the euro against the U.S. dollar, making oil more expensive for buyers in the Eurozone and potentially dampening demand. However, the prospect of economic growth-supporting measures, including looser monetary policy, could also spur renewed energy consumption, helping to balance out the negative impact of higher oil prices.
Despite the current weakness in oil markets, several factors could drive prices higher in the coming weeks and months. The most immediate upside risk stems from the ongoing Israel-Hamas conflict, and the potential for an escalation involving Iran, a key player in the global oil market. Should the conflict spread or involve more direct military action against Iranian oil infrastructure, global supply disruptions could cause a spike in prices.
Additionally, any significant economic stimulus from China or further evidence of strong U.S. demand could provide support for oil prices. While demand forecasts for 2024 and 2025 have been revised downward, short-term factors such as weather-related disruptions, refinery outages, or supply chain issues could still lead to volatility in the oil markets.
As of Thursday’s early Asian trading, oil prices have shown some signs of recovery after two days of steep declines. However, the market remains highly volatile, with a host of factors—ranging from geopolitical risks in the Middle East to economic developments in China and Europe—continuing to drive uncertainty.
For now, the unexpected decline in U.S. crude stockpiles has provided a temporary boost to prices, but the longer-term outlook remains clouded by concerns over demand growth and the broader global economic slowdown. Investors and traders will continue to monitor developments closely, especially the upcoming EIA data release, which could provide further insights into the direction of the oil markets.
With several upside risks still looming, oil prices are likely to remain highly sensitive to geopolitical events, economic data, and policy decisions in the coming weeks. For energy market participants, this means bracing for continued volatility and staying attuned to both short-term developments and longer-term trends in the global oil market.
