Crude oil prices declined by 3.12 percent last week due to demand concerns arising from ongoing geopolitical conflicts in the Middle East, which created uncertainty about economic growth and raised questions about energy demand in the medium term. The price decline was mitigated by Israel’s retaliatory attack on Iran, which was smaller than previously feared.
Data compiled by Polymerupdate Research showed that the benchmark Brent crude oil futures for near-month delivery on the New York Mercantile Exchange (Nymex) fell by over 3 percent to close the last week at US$ 87.29 a barrel from US$ 90.45 a barrel reported towards the end of the previous week. The downward sentiment was also supported by rising inventory in the United States, the world’s largest producer and consumer of crude oil, accounting for around 20 percent of global production and consumption.
Similarly, Nymex RBOB Gasoline futures for near-month delivery closed last week at US$ 271.03 a gallon, after initially rising to a peak of US$ 285.23 a gallon on Tuesday. Overall, the energy futures recorded a decline of approximately US$ 9 from the previous week’s close of US$ 280.9 a gallon. Following other energy contracts, WTI Cushing for near-month delivery also closed with a loss at US$ 83.14 a barrel, a decline from the previous week’s close of US$ 85.66 a barrel. The energy contracts declined by approximately 1 percent in early Monday trade amid demand concerns as the global economy is likely to face challenges following a multi-pronged war undergoing in the Middle East, with the new front emerging between Iran and Israel.
A report recently published by AnandRathi Investment Services, stated, “Oil prices declined in the early trading hours on Monday, extending losses from the prior week amid growing hopes that the Iran-Israel conflict will not escalate further, while the prospect of steady U.S. interest rates and worsening global economic conditions also weighed. Both the benchmarks were down more than 3 percent last week. Concerns that a conflict between Iran and Israel will grow, somewhat dwindled in recent sessions, even as Israel reportedly carried out some strikes against Iran on Friday. But Iran largely downplayed the impact of the Israeli strikes, and flagged no immediate plans for retaliation.”
Weakness in global fundamentalsThe People's Bank of China (PBOC) left benchmark lending rates unchanged at the April fixing, which was in line with market expectations. The one-year loan prime rate (LPR), the benchmark for most corporate and household loans, was maintained at 3.45 percent. Meanwhile, the five-year rate, a reference for property mortgages, was retained at 3.95 percent for the second straight month, following the biggest-ever reduction of 25 basis points (bps) in February to support the housing market.
Both rates are at record lows as the government sought to shore up economic growth by keeping local monetary conditions in the face of headwinds from the property sector, and a deflationary trend persisted. The decisions came after the second-largest economies posted economic growth faster than expected in the January-March 2024 quarter amid a weakening yuan. Monday's move came following the PBOC's decision to hold medium-term lending rates last week and drain cash from the banking system through the bond instrument.
Also, the dollar index eased toward 106-mark on Monday but held close to its highest levels in six months as strong US economic data and hawkish commentary from Federal Reserve officials cemented expectations that the central bank will delay interest rate cuts, with some analysts saying the Fed may not ease at all this year.
International Energy Agency (IEA) revised downwards its global oil demand growth forecast to 1.2 million barrels per day (bpd) for 2024, down by roughly 100,000 bpd from the previous month’s predictions, amid weak deliveries by the Organisation for Economic Cooperation and Development (OECD). IEA said in its monthly oil market report that with the post-Covid rebound now largely complete and the electric vehicle fleet expanding, oil demand growth is expected to slow down to 1.2 million bpd and 1.1 million bpd in 2024 and 2025, respectively.
Rahul Kalantri, vice president for commodities at Mehta Equities Ltd, stated, “Crude oil prices had eased amid a strengthening dollar index and global growth concerns. The increase in US crude oil inventories surpassed expectations, further exerting downward pressure on oil prices. Nevertheless, hopes for Chinese demand and ongoing tensions between Israel and Iran are providing some support at lower price levels.”
OutlookThis lack of immediate retaliation was a key driver of bets that the conflict would not worsen. Recent data showing a bigger-than-expected build in U.S. inventories furthered these concerns. Markets also feared that higher-for-longer U.S. interest rates and sticky inflation would dampen economic growth this year. Last week witnessed a remarkable demonstration of crude oil resilience amid escalating geopolitical tensions in the Middle East and strong economic data from the United States. Market participants are closely monitoring developments in the Middle East and any changes in U.S. economic policy, as these factors could likely influence market conditions and guiding investment strategies in the coming economic policy, as these factors could likely influence market conditions and guiding investment strategies in future.
As long as there is no fresh trigger on the geopolitical front, macro headwinds and demand concerns will rule oil markets. Meanwhile, despite US summer travel demand ahead, stockpiles are rising consistently. This would keep the downward bias intact. Nonetheless, the market needs to remain cautious as geopolitical tensions have eased somewhat but cannot be fully ignored.
DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
