Oil bounces from multi-month lows on tight supply amid Israel-Iran conflict; Brent nears $77/bbl

Global crude oil prices rose about one per cent in volatile trade on Tuesday, August 7, bouncing off multi-month lows hit in the previous session as investors turned their attention turned to supply tightness amid the Israel-Iran conflict and as financial markets recovered from their recent slump.

Brent crude futures were up 58 cents, or 0.8 per cent, to $76.88 a barrel. US West Texas Intermediate futures were up 68 cents, or 0.9 per cent, to $73.62 per barrel. Brent futures had slumped to their lowest since early January in the previous session, while WTI touched its lowest since February, as a global stock market rout deepened on growing concerns of a recession in the US.

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What’s weighing on crude oil prices?

-Iran’s vow of retaliation against Israel and the US following the killing of two militant leaders has raised concerns that a wider war is brewing in the Middle East, which could have a direct impact on supplies from the region.

-Lower production at Libya’s 300,000 barrel-per-day Sharara oilfield is also adding to concerns of supply shortages. Libya’s National Oil Corp said on Tuesday it would start to gradually decrease production at the field due to protests. 

-Recent declines in crude oil and fuel inventories at major trading hubs are also supporting oil prices. Analysts said that oil fundamentals are still suggesting an undersupplied oil market, with oil inventories still falling. Gasoline demand in the US was likely at over nine million barrels per day last week, also instilling confidence in the country’s economy.

-US crude stockpiles posted a fifth consecutive decline in the week ended July 26, the longest falling streak since January 2021. Fuel inventories at Europe’s Amsterdam-Rotterdam-Antwerp trading hub were at their lowest since February as of August 3.

-The US is the largest petroleum consumer, making its economy a critical component of oil demand. US Federal Reserve policymakers pushed back on Monday against the notion that weaker than expected July jobs data means the economy is in recessionary freefall. 

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Where are oil prices headed?

Analysts said that WTI crude oil prices continued their downward trend on Monday, following a four per cent decline last week, owing to concerns about a potential US recession intensified after a disappointing jobs report, which further weakened demand prospects amid sluggish demand from China. 

However, production losses at Libya’s largest oilfield, which was forced to begin winding down production due to protests, helped prices recover from a seven-month low of $71.67 per barrel, closing near $73, they added.

‘’Today, crude prices have surged above $74 per barrel, driven by a recovery in Asian markets and increasing concerns over potential heightened tensions in the Middle East, particularly as Israel reportedly prepares for a possible retaliatory strike against Iran and regional militias in response to the assassinations of Hezbollah and Hamas leaders,” said Kaynat Chainwala, AVP-Commodity Research, Kotak Securities.

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Anlsyts also noted that crude oil prices hit eight-month lows amid a substantial sell-off in global equity markets, driven by strong gains in the Japanese Yen. Hedge funds sold riskier assets and covered short positions in the Japanese Yen, triggering a sell-off in crude oil. Geopolitical tensions in Middle East and a weaker dollar index provided some support at lower price levels. 

‘’We anticipate crude oil prices to remain volatile this week due to fluctuations in global financial markets and Middle East tensions. For today’s session, crude oil has support at $72.70-72.00 and resistance at $74.10-74.80. In INR terms, crude oil is supported at ₹6,070-5,990 and faces resistance at ₹6,210-6,270,” said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.