Since the start of the Israel-Palestine war, there have been fears that oil exports from the energy-rich Middle East region could be disturbed and that may lift global oil prices. However, to date, exports of oil and other energy products from the region have remained relatively unscathed easing tension of supply disruptions.
The Middle East is a critical area for global energy production and transportation, with several major oil-producing countries that combinedly contribute to more than 30 percent of global oil production.
Despite the ongoing output cut by Saudi Arabia and other members of OPEC plus countries, oil output from the cartel has risen for the third straight month in October. This was due to increased production from Nigeria and Angola. Small members in the group have also contributed by managing to overcome factors affecting output and supply. As per the Reuters report, the group pumped 27.90 million bpd in September, with an increase of 180,000 barrels per day.
Iran’s output also increased to its highest level since 2018 when the US re-imposed sanctions on its oil exports. A similar hike was reported from Iraq as well. Meanwhile, there was no immediate boost in Venezuela’s oil production despite the US easing sanctions on its oil sector recently.
Concerns over demand from the world’s second-largest consumer of oil, China adversely affected the demand prospects. China’s economy has been suffering challenges in areas like the property sector, exports, debt, unemployment, consumption, spending, and investment affecting the demand for energy commodities like oil. The latest economic release from the country showed exports shrank more than expected in October. There was an unexpected improvement in imports due to economic stimulus measures, but prolonged weakness in exports could stymie growth and curtail oil demand.
A massive buildup in US crude inventories and a surge in output also put pressure on the outlook for the fuel. As per the recent US API data, the US crude inventories surged almost 12 million barrels last week against a forecast of 3,00,000 barrels. The US oil output is at record levels driven by the efficient use of new drilling methods. In August 2023, production from the country recorded 13.05 million barrels per day, breaking its previous month’s record. Higher production also led to record-level exports.
The ongoing demand-supply dynamics are not supportive of a sharp recovery in prices. The US output and exports are expected to be held firm in the coming months. There are forecasts of a gradual improvement in output from OPEC countries like Venezuela, Iran, and Iraq. This may probably replace the shortage of barrels from Saudi Arabia and Russia. China’s economic woes, forecast of higher for longer interest rates, and a strong US dollar may be the other obstacle for the commodity in the coming run.
Anyhow, trades remain cautious, tracking the developments in the Middle East as any escalation of tension would potentially disturb the oil supply chain and thus the prices.
(The author, Hareesh V, is Head of Commodities at Geojit Financial Services)
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