Oil Prices Surge Though Poised for Fourth Weekly Decline Amid Middle East Tensions

Oil prices experienced a modest uptick on Friday, August 1st, 2024. However, this increase is unlikely to prevent a fourth consecutive week of losses. Concerns about slowing global economic growth and declining demand are overshadowing the potential impact of rising tensions in the Middle East.

The primary driver behind the recent oil price slump is a wave of disappointing economic data. Weaker-than-expected purchasing managers’ index (PMI) readings from both the United States and China, the world’s top oil importer, have raised fears of an impending economic slowdown. This data follows a similar trend in China, where dismal manufacturing activity has fueled anxieties about future oil demand.

Even the recent killing of a Hamas leader in Iran, which initially sparked worries of a wider conflict in the Middle East, couldn’t significantly dampen the bearish sentiment. While these tensions did provide a temporary boost to oil prices, their impact was largely negated by broader economic concerns.

The recent meeting of the Organization of the Petroleum Exporting Countries and allies (OPEC+) further muddied the waters. OPEC+ opted to maintain its current production levels and reiterated its ability to adjust output if necessary. This lack of a clear production strategy offered little guidance to the market.

Despite the weekly decline, oil prices are expected to experience some modest gains by the close of trading on Friday. Brent crude is anticipated to settle at around $79.84 per barrel, while West Texas Intermediate (WTI) could reach $75.71 per barrel. However, these gains are unlikely to be enough to offset the losses incurred throughout the week. Both Brent and WTI are projected to end the week down between 0.4% and 0.9%.

The main culprit behind oil’s weakness is the growing belief that a global economic slowdown is on the horizon. This would inevitably lead to a decrease in demand for oil. PMI data from key economies like the US and China underscores these concerns.

China, the world’s largest oil importer, remains a significant source of anxiety for the market. The lack of concrete details from Beijing regarding its plans to stimulate economic growth adds further uncertainty to the demand outlook.
The US Federal Reserve’s potential interest rate cut in September has also generated mixed reactions. While a rate cut could potentially stimulate economic activity, some traders fear it may be too late to prevent a soft landing for the US economy.

The possibility of a full-blown conflict in the Middle East remains a factor to watch. The recent attack on a Hamas leader in Iran has raised concerns about retaliation from both Hamas and Iran. Earlier in the week, tensions flared between Israel and Hezbollah, another Iran-backed group. These developments have prompted traders to incorporate some risk premium into oil prices due to the potential for supply disruptions in the region.