Oil Prices Slip Amid Recession Concerns, Easing Geopolitical Tensions
Crisil Ratings says that recession fears and slack demand cull crude amid lower geopolitical tensions
Crisil Ratings has said that global crude oil prices took a sharp dive in September, dropping 8.1 per cent to USD 74.3 per barrel, amid escalating concerns of a looming recession and softening demand. The decline was mainly due to subdued demand from major economies. Demand in China, a major consumer, grew sequentially but declined on-year. Moreover, geopolitical tensions, which had driven up the prices in July, saw a temporary easing, it added.
As a result, consumers and businesses felt less pressured to make substantial purchases, which diminished oil demand. Between January and September, dated Brent averaged USD 82.7 per bbl, up a marginal 1 per cent on-year. That said, the recent flareup in the geopolitical tensions is limiting the decline and the prices are expected to stay in the USD 75 to 79 per bbl range in the fourth quarter of calendar 2024. “Developments in the Israel-Iran conflict are a key monitorable,” according to the Crisil.
Demand Growth Subdued
Crude oil demand clocked a marginal growth of 1 per cent both sequentially and on-year in September. Demand rose 6 per cent on-month in China and showed positive signs in Europe, but was partially offset by a slowdown in Japan.
Talking about supply lag on OPEC+ delay, the report added that overall crude oil supply during the month declined 1 per cent on the 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.
Price Uncertainty Amid Geopolitical Turmoil
In September, oil prices declined amid some easing in geopolitical tensions. However, this month, they have been on a cliff on mounting fears of a direct conflict between Israel and Iran, which accounts for 4 per cent of the global oil supply. Any Israeli attack on the oil infrastructure of Iran can disrupt its crude supplies.
That said, the spare production capacity in the Middle East – more than 5 mbpd – can replace this cut in output. Besides, the US and other member nations of the International Energy Agency (IEA) hold 3,700 million barrels of crude oil and its products in their inventory (as of June). This could be also released if the conflict escalates, Crisil Ratings mentioned.
Nevertheless, prices could spike as any escalation would disrupt Gulf oil supply to major importing countries as Iran could choke the Strait of Hormuz, in a potential repeat of the Red Sea crisis. The Strait of Hormuz is a crucial transit route for oil careers to Asian countries. It accounted for 21 per cent of the global crude oil flow in 2022.
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 of the conflict is limited given the bearish sentiment owing to subdued demand growth in China, the report stated.
