The global oil markets experienced significant turbulence this week, initially driven by heightened geopolitical tensions but ultimately influenced by weak economic fundamentals. Following a brief dip in oil prices at the start of the week, prices surged nearly 4% after the assassination of Hamas leader Ismail Haniyeh in Tehran on Wednesday. This event, combined with the killing of a senior Hezbollah commander in Beirut the day before, heightened fears of potential supply disruptions from the oil-rich Middle East.
The assassination of Haniyeh occurred in Tehran following his attendance at the inauguration of Iran’s new president. Although Israel has not officially claimed responsibility, Iranian officials and Hamas have accused Israel of orchestrating the strike. A U.S. official has corroborated that both Haniyeh and Hezbollah commander Fuad Shukr were targeted by Israeli actions.
The situation further escalated when Iranian Supreme Leader Ayatollah Ali Khamenei reportedly threatened a direct response against Israel, intensifying fears of a broader regional conflict. As tensions soared, Brent crude oil prices spiked above $81 per barrel, and WTI approached $79 per barrel.
However, the anticipated Iranian retaliation failed to materialize, and the geopolitical premium on oil prices began to wane. Despite initial fears, the lack of significant follow-up actions from Iran and a measured response to previous Israeli strikes suggested a reluctance to escalate the conflict further.
As geopolitical tensions eased, oil prices fell sharply by the end of the week. Brent crude dropped 3.4% to settle below $77 per barrel, marking its lowest price since early January. October delivery Brent crude fell to $76.81 per barrel, while U.S. crude for September delivery settled at $73.52 per barrel. Both benchmarks recorded more than 7% declines over the past four weeks, marking the longest streak of weekly losses this year.
Analysts suggest that the weak economic fundamentals are outweighing the impact of geopolitical risks. “The oil market shifted from a focus on geopolitical events to economic data concerns,” said Tim Snyder, chief economist at Matador Economics. “While geopolitical tensions initially drove prices up, economic indicators have now taken over.”
Falling demand concerns, particularly from China—the world’s largest crude importer—and the U.S., the top consumer, contributed to the decline. Data from July showed an 11% drop in China’s fuel oil imports for the first half of 2024, raising concerns about global demand.
On the supply side, OPEC’s plans to increase production next quarter have been reiterated, though officials remain open to adjusting these plans based on market conditions. “Weak economic growth in major economies could dampen oil demand despite any supply disruptions from geopolitical tensions,” noted Panmure Liberum analyst Ashley Kelty.
China’s declining manufacturing activity and weaker refinery output have further exacerbated concerns about global oil demand. With Asia’s crude oil imports in July hitting a two-year low, driven by reduced demand in China and India, the outlook remains bleak.
The recent drop in oil prices underscores that, despite geopolitical fears, fundamental economic factors continue to dominate the oil market. As for potential impacts on petrol prices in Pakistan, where indirect taxes on petroleum products are a significant revenue source, the effects on consumer prices remain to be seen.
