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If not for Israel's intensified strikes on Lebanon and later Yemen, oil prices would likely have dropped below the $70 per barrel mark. The potential risk of disrupting Middle Eastern oil supplies has pushed prices higher.

Recently, oil prices experienced a sell-off due to reports suggesting that Saudi Arabia might ramp up oil production earlier than anticipated. West Texas Intermediate (WTI) crude dropped by around 5 percent last week while Brent crude fell by 4 percent, largely due to increased supply from OPEC.

The ongoing conflict in the Middle East has lasted almost a year without significantly impacting oil supply or prices. While recent price spikes are linked to concerns about escalating attacks, these fears may be overblown unless Iran becomes involved. However, experts believe the increased presence of the US Navy in the region might prevent such an escalation.

Moreover, with over five million barrels per day of idle capacity in the Middle East, there's little immediate pressure for oil prices to rise sharply. Reports of increased production from Libya, where opposing factions have reached an agreement, have also contributed to the downward pressure on oil prices.

As a result, any rally in crude oil is likely to be short-lived. Hedge funds currently hold record short positions in crude oil, indicating a highly pessimistic outlook on future prices.

The oil market is undergoing structural changes, with nearly 50 percent of incremental demand for oil and petroleum products coming from China. This demand has now weakened, and the recent stimulus announced by China is unlikely to significantly alter the demand landscape.

If housing demand picks up following the stimulus, the impact of China's measures is likely to be more significant for metals than for oil. This shift is due to rapid changes in China's transportation sector. China's fuel consumption remains low, with analysts suggesting that the country's fuel demand may peak within the next year, if it hasn't already.

This pessimistic outlook stems from the surge in electric vehicle sales and the transition of trucking fuel from diesel to LNG. Reflecting these concerns, OPEC lowered its oil demand growth forecast 2024. In its September Monthly Oil Market Report, OPEC predicts global demand growth of 2.03 million barrels per day (bpd) in 2024, down from the earlier estimate of 2.11 million bpd. The report also revised China's demand estimate, reducing it from 700,000 bpd to 653,000 bpd.

The International Energy Agency (IEA), which often holds a different view from OPEC on oil demand, stated in its September report that global oil demand growth has slowed down, projecting an increase of just 900,000 bpd in 2024 due to the rapid deceleration of Chinese consumption.

In the first half of 2024, global oil demand growth was only 800,000 bpd year-on-year, marking the slowest pace since 2020, according to the IEA. This decline was driven by China's demand, which contracted annually for the fourth consecutive month in July by 280,000 bpd. Daan Struyven, head of oil research at Goldman Sachs, noted that China's oil demand growth has slowed significantly, currently at around 200,000 bpd each year, in contrast to the 500,000-600,000 bpd annual growth seen in the five years before the COVID-19 pandemic.

The shift in China's transportation fuel mix is expected to be permanent, having a long-lasting impact on oil demand and prices. Russell Hardy, CEO of the world's largest independent oil trader, Vitol Group, mentioned in a Bloomberg interview that “Gasoline is likely to peak this year or next year in China — not because nobody's moving, but simply because the fleet is slowly changing towards electric vehicles”.

Similarly, a forecast by China's National Petroleum Corporation (CNPC) indicated that demand for petroleum products in China might peak before next year, driven by the acceleration of the energy transition, which is expected to curb oil product demand growth.

Given this scenario, we could be moving towards a period where oil prices remain subdued, regardless of whether there is war or peace in the Middle East.

Investing insights from our research team

Craftsman Automation: Significant headroom to grow, valuation at fair level

RITES: Subdued business outlook, high valuation can limit returns

Cantabil Retail India: Demand to pick up from H2; valuations attractive

Tracker

Monsoon Watch: This time, rains may extend to early October

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New titans of Wall Street: How trading firms stole a march on big banks (republished from the FT)

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Assassinations by Israel give it a short-term high but no durable peace

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Food adulteration must be addressed as a public health issue, not a political tool

Secularism with Indian characteristics

Technical Picks: Reliance Infrastructure, ACC, Praj Industries

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