Overshadowed by geopolitics but finally overtaken by weak fundamentals, it has been a week of turmoil in the global oil markets. After a soft beginning to the week with oil prices edging lower, prices spiked by almost four per cent in the immediate aftermath of the killing of Hamas leader Ismail Haniyeh in Tehran on Wednesday.

This coupled with the killing of a senior Hezbollah commander in Beirut a day earlier, escalated tensions in the Middle East, raising concerns about potential supply disruptions from the oil-rich region.

Haniyeh was assassinated in Iran’s capital after he attended the inauguration of the new Iranian president. Although Israel has not officially conceded to the killing of Haniyeh, Iranian officials and Hamas have blamed Israel for the strike that killed him.

A US official also told CBS News’s Margaret Brennan that the US has determined that both Haniyeh and top Hezbollah Commander Fuad Shukr were killed in Israeli strikes.

The geopolitical situation intensified when Iranian Supreme Leader Ayatollah Ali Khamenei reportedly ordered a direct strike on Israel in response to Haniyeh’s assassination.

Ayatollah Khamenei said Israel has “prepared the ground for its severe punishment”, heightening fears that the ongoing Palestine-Israel conflict in Gaza could expand into a wider regional war and push oil prices higher. With pressure mounting in the Middle East, Brent topped $81 per barrel before paring gains, while WTI climbed closer to $79 per barrel.

But despite the promise of retaliation, there has been an eerie silence on the geopolitical front ever since. Although no one could rule that out at this moment, yet, until the writing of these lines, the much-anticipated Iranian strikes on Israel have not materialised. That has taken the gloss off the geopolitical premium on crude oil prices. In April too when Iran reacted to the Israeli attack on its assets in Damascus, its response was measured. Many felt it did not want to create a major regional crisis.

Geopolitical jitters don’t last long as weak economic growth in major economies could stifle oil demand despite increased tensions in the Middle East

Amid weakening fundamentals and global crude demand concerns overshadowing heightened geopolitical risks, by Friday closing, oil prices had slumped to their lowest point in almost seven months.

Brent crude slid 3.4pc, to settle below $77 a barrel, its lowest settlement price since early January. Brent crude for October delivery fell $2.71 to $76.81 per barrel, while benchmark US crude oil for September delivery fell $2.79 to $73.52 per barrel. Both the crude benchmarks have lost more than 7pc over the past four weeks in the longest run of weekly losses this year.

Fundamentals thus seemed to be getting back into the driver’s seat. Geopolitical jitters did not last long. “Oil has been pumped up on just extraordinary jitters over the Middle East situation, but here we are several days after a significant event,” John Kilduff, partner at Again Capital in New York told Reuters.

“We moved from a demand-driven market to a geopolitical one for maybe two days [and] then we absolutely nosedived on all this economic data,” Reuters quoted Tim Snyder, chief economist at Matador Economics, as saying.

Driven by the concerns about deteriorating demand in China, the world’s biggest crude importer, and the US, the commodity’s top consumer, oil posted its fourth straight weekly decline, Bloomberg reported. Data released in July showed that China’s total fuel oil imports dropped 11pc in the first half of 2024, raising concerns about the wider demand outlook in the world’s biggest crude importer.

On the supply side, the Organisation of the Petroleum Exporting Countries (OPEC) remains on track to boost production starting next quarter, a plan it reiterated at a monitoring meeting last Thursday. Yet, officials have insisted supply hikes can be paused or reversed as needed. In the current scenario, that remains a possibility. “Weak economic growth in major economies could stifle oil demand despite increased tensions in the Middle East that could impact supplies,” Panmure Liberum analyst Ashley Kelty told Noah Browning of Reuters.

Falling manufacturing activity in China also inhibited prices, adding to concerns about demand growth after June data showed imports and refinery activity lower than a year earlier. Asia’s crude oil imports in July fell to their lowest in two years, sapped by weak demand in China and India, data from LSEG Oil Research underlined.

Economic data from China and a survey showing weaker manufacturing activity across Asia, Europe, and the United States raised the risk of a sluggish global economic recovery that would weigh on oil consumption.

The rapid downgrading of the geopolitical premium on oil markets is another firm indication that oil market fundamentals continue to stay weak despite OPEC’s efforts to rein in crude markets by keeping a tight lid on the supply side of the oil economics. And even if Iran strikes Israel, the geopolitical impact may not last for long — courtesy of the weak oil fundamentals.

Whether this translates into better petrol prices for Pakistani consumers is an altogether different story. With avenues of direct taxation limited in the country, indirect taxes on petroleum products remain an easy way out for Islamabad to generate the required funds.

Published in Dawn, The Business and Finance Weekly, August 5th, 2024