Oil prices steadied as a sharp drop on talks of a possible ceasefire between Israel and Hezbollah spooked global markets. It would be right to state that the proper interpretation lies in the fact that Brent crude futures gained 11 cents at $77.29 a barrel and U.S. West Texas Intermediate advanced 3 cents at $73.60 a barrel. Before this, both benchmarks had plummeted by more than 4 percent on fears of relaxation in the Middle East. Still, traders still tread carefully, with threats of the next escalation, which could involve an Israeli attack on Iran’s oil infrastructure.
The price collapse came following news that Hezbollah may ease up, which brings a shine of hope for the end of conflict that sparked market reactions. The essence of the conflict is in its general ramifications for oil supply since the next military battle might be able to temporarily stop the production or transportation lines, especially around critical chokepoints such as the Strait of Hormuz.
At the very least, this ambiguity is expected to bring additional oil market volatility. Still, supply risk has remained at the forefront of concerns, especially if the cease-fire talks fail or, worse, become more entrenched. The fluctuations of the past few weeks have shown how a geopolitical development in the Middle East squarely impacts the sentiment of the energy market. For example, last week, with oil prices spiking, Iran fired missiles at Israel in retaliation for Israeli attacks on Tehran-backed Hezbollah forces in Lebanon.
Geopolitical tensions have compounded existing market concerns over softer-than-expected demand growth. The U.S. Energy Information Administration (EIA) cut its expectations for global oil demand growth by 20,000 barrels a day for 2024; its revised forecast is underpinned by weaker industrial activity in the main economies, the U.S. and China. That added a bearish tinge to market fundamentals despite growing supply risks.
Geopolitically, the Middle East is crucial because it remains the world’s biggest oil supplier in the global market and takes up the lion’s share of global crude exports. Any problems in this region have knock-on effects for global energy markets. But it’s not all about supply, and those factors are not keeping investors sleepless at night. On the demand side, there are clear-cut signs of a slowdown in industrial production, especially in the US and China, which consume two-thirds of the world’s energy.
Even the threat of an Israel-Hezbollah ceasefire is likely to soothe short-term supply concerns, but market watchers are also paying attention to other events. Were Hezbollah or Iran to resume hostilities—perhaps in revenge for Israeli military operations—the dynamics could change very quickly. Just think, for instance, that Israel has consistently made credible threats to bomb Iran’s oil infrastructure—a move that would escalate the conflict to entirely new extremes.
Market participants are also tracking the weather because Hurricane Milton is starting to slam into Florida’s Gulf Coast, one of the strongest Atlantic storms in memory. The storm could cut off gasoline supplies to one of the biggest oil-consuming parts of the country. Many ports have shut down in Florida, and energy companies have shuttered some operations that may temporarily squeeze the U.S. market.
Given the risk factors mentioned above, analysts say oil prices can be expected to swing within a new trading range, that is, between $72.50 and $77.50, or outside that range. Demand concerns and the impact of Hurricane Milton can be expected to drive oil market dynamics in the coming weeks as uncertainty regarding the next steps in the Israel-Iran-Hezbollah conflict lingers in the air.
The investors are cautioned, and any noise in the Middle East’s oil supply will trigger enormous dynamics in the international energy markets. Small conflicts themselves cause huge price volatility at the core of everything from inflation to consumers’ prices around the world because of its importance in global crude production.
