Recession fears, slack demand cull crude long with easing Israel-Iran tension

The decline was mainly due to subdued demand from major economies, led by China, which is the world’s largest oil consumer. Another reason is the easing geopolitical tension, which had driven up the prices in July.
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MUMBAI: After declining in September amid some easing in geopolitical tensions in the Middle East, the price has been on a cliff (jumping 19 per cent) after Iran fired close to 200 ballistic missiles on Israel early this month, leaving the whole world in mounting fears of a direct conflict between the two sworn enemies. Recession fears, slack demand cull crude amid lower geopolitical tensions.

While the world was fearing a serious Israeli retaliation on the nuclear/oil facilities of Iran, there came a reprieve on Tuesday when Israel reportedly assured the US that it will not target these facilities across the border. Iran accounts for four percent of the global oil supply, while the West Asia region is the fossil fuel capital of the world.

Following this news, along with Opec’s decision to begin improving its supplies from next month sent crude prices crashing to $74.3/barrel, taking the total decline to a sharp 8.1 percent from the peak in the first and second week of October, according to a Crisil Ratings analysis.

The decline was mainly due to subdued demand from major economies, led by China, which is the world’s largest oil consumer. Another reason is the easing geopolitical tension, which had driven up the prices in July. As a result, consumers and businesses feel less pressure to make substantial purchases, which diminishes the oil demand. Between January and September, Brent averaged $82.7/barrel, up just 1 percent on-year, the agency said.

That said, the recent flare-up in the geopolitical tension is limiting the decline and the prices are expected to stay in the $75-79/barrel range in the fourth quarter of 2024. Developments in the Israel-Iran conflict are a key monitorable.

Crude demand clocked a marginal growth of 1 percent both sequentially and on-year in September. Demand rose 6 percent  on-month in China and showed positive signs in Europe, but was partially offset by a slowdown in Japan, which is the fourth largest consumer of fossil fuel after China, the US and India.

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Overall crude supply during September declined 1 percent on-year, mostly owing to a fall in supply from Opec nations, especially Libya, where the output hit its lowest mark since 2021 with the country’s central bank in turmoil. Iraq’s attempts to adhere to the pledged cutbacks also dragged down supplies. Opec has also deferred plans to increase production by a few months as the members delay phasing out of their voluntary cuts.

While an Israeli attack on the Iranian oil infrastructure can disrupt crude supplies, the spare production capacity in the Middle East, which is more than 5 million barrels a day, can replace this loss in output. Besides, the US and other member nations of the International Energy Agency hold 37 billion barrels oil and its products in their inventory as of June. This could be also released if the conflict escalates.

Nevertheless, prices could spike as any escalation would disrupt Gulf oil supply to major importing countries as Iran can choke the Strait of Hormuz, which is a crucial transit route for oil careers to Asian countries, accounting for 21 percent of the global crude flow.

The Red Sea crisis that started in November 2023 had doubled shipping costs as vessels were forced to re-route to avoid attacks from the Houthis of Yemen. As of now, the impact is limited given the bearish sentiment owing to subdued demand growth in China.

Meanwhile, domestic crude production stood at 5,68,000 barrels per day in in August, down 3 percent on-year. ONGC’s output declined 2 percent owing to a fall in output from ageing fields. Output from fields of other majors such as Vedanta and Reliance Industries also declined during the month.

Share of Russian crude imports increased to 45 percent in July while volume from Saudi Arabia drop by 9 percent. Overall oil realizations stood at $85.1/barrel in July.

Higher Russian oil imports helped the country reduce oil realisations by $1.8/barrel, saving $80-100 million for domestic refiners in July.

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