Oil Prices Surge Despite Falling Demand...Forecasts of $120 as Middle East War Intensifies

【Financial News, New York — Correspondent Lee Byung-chul】 International oil prices are nearing $100 per barrel as armed clashes between the United States and Iran intensify again. After Iran attacked a United States Navy warship and the United States struck Iranian tankers, Saudi Arabia’s oil facilities also came under attack. Concerns are growing that the Middle East war could spread to major oil-producing countries and energy supply chains.
The latest rise in oil prices is particularly notable because it comes as crude imports by China, the world’s largest crude oil importer, have fallen by nearly 40% from prewar levels and global oil demand has also declined. This indicates that weaker demand has failed to offset the supply shock caused by the war. In addition, OPEC Plus (OPEC+)—a group comprising the Organization of the Petroleum Exporting Countries (OPEC) and other major oil producers—has halted production increases that continued for six months. Warnings have emerged that oil prices could break above $100 per barrel and head back toward $120.

On the 7th, Brent crude for November delivery, the international oil-price benchmark, climbed as high as $98.06 per barrel intraday. West Texas Intermediate crude oil (WTI), the U.S. benchmark, also rose to $93.29. Brent crude surpassed $98 intraday for the first time since late July.
The latest rally was fueled by the renewed escalation of armed clashes between the United States and Iran. After the Islamic Revolutionary Guard Corps (IRGC) launched missiles at two United States Navy warships, the U.S. military disabled three Iranian tankers in a retaliatory strike. On the 7th, oil facilities operated by Saudi Aramco in Jizan, Saudi Arabia, were also attacked.
Arne Rømer Rasmussen, a senior analyst at Global Risk Management, described the developments to the Financial Times (FT) as a "serious escalation of tensions." Markets are particularly concerned that ship-to-ship crude oil transfers outside the Gulf could also be disrupted. Such transfers have served as a de facto alternative route for supplying crude to global oil markets since normal shipping through the Strait of Hormuz became difficult. If this alternative route is blocked as well, the issue will shift from production volumes to whether crude can be transported to the market.

Another factor heightening supply concerns is OPEC+. At a meeting on the 6th, seven key OPEC+ oil-producing countries agreed to keep October production at September levels. This ended production increases that had continued for six months.
OPEC+ added 188,000 barrels per day to supply in September, largely reversing voluntary production cuts agreed previously. However, it did not proceed with an additional increase in October, even as international oil prices again approached $100 per barrel.
A bigger problem is that even if OPEC+ decides to increase production, there is no guarantee that the amount of crude reaching the market will rise by the same amount. If disruptions to shipping through the Strait of Hormuz continue, Gulf oil producers may find it difficult to transport additional output to global markets even if they increase production.
In the past, when oil prices approached $100 per barrel, the spare production capacity of OPEC+ members, including Saudi Arabia, served as a safety valve that helped prevent further price increases. Now, however, transportation capacity rather than production capacity is determining the market. The war is effectively weakening OPEC+’s traditional ability to regulate oil prices.

What is even more unusual is that global oil demand is contracting sharply. According to Reuters, China’s seaborne crude oil imports averaged 7.14 million barrels per day in August, a slight increase from 6.93 million barrels per day in July. However, that was about 37% lower than the three-month average of 11.41 million barrels per day before the war began. Seaborne crude imports across Asia also fell by about 16% from February.
The International Energy Agency (IEA) expects global oil demand this year to decline by 1.6 million barrels per day from last year. Normally, a nearly 40% drop in purchases by China, the world’s largest crude oil importer, combined with weaker global demand would put strong downward pressure on international oil prices. This time, however, the opposite is happening.
That is because supply is declining faster than demand. The IEA forecasts that global oil supply will fall by an average of 4.3 million barrels per day this year from last year. Gulf oil production reached 23.9 million barrels per day in July, recovering by 2.5 million barrels per day from the previous month, but it was still 8.3 million barrels per day below prewar levels.  Ultimately, even the powerful downward pressure from weaker demand in China has failed to offset the supply shock in the Middle East.

The question is what happens next. Since the war began on February 28, countries have released large amounts of crude from their strategic petroleum reserves (SPR) to prevent oil prices from surging. China also cut crude purchases by about one-third in the early stages of the war and released oil from its reserves onto the market.
But as the war has lasted more than six months, this buffer is rapidly weakening. Strategic reserves outside China are estimated to have fallen by more than 400 million barrels since the war began, while the volume of crude carried aboard oil tankers is also believed to have dropped to its lowest level in years.
China has recently resumed purchasing crude despite accepting higher prices. Chinese buyers that had relied on relatively inexpensive Russian and Iranian crude are turning to crude from Iraq and Saudi Arabia.
Daan Struyven, global co-head of commodities research at Goldman Sachs, warned on Bloomberg Television on the 7th that Brent crude could rise to $120 per barrel if attacks on ships expand and intensify.




[email protected] Lee Byung-chul, correspondent Reporter