Oil Prices Drop Amid Ongoing Uncertainty in Demand Prospects
Oil Prices Drop Amid Ongoing Uncertainty in Demand Prospects

Oil Prices Drop Amid Ongoing Uncertainty in Demand Prospects

  • 21-Feb-2024 6:26 PM
  • Journalist: Stella Fernandes

Oil prices experienced a decline on Tuesday, influenced by the ongoing uncertainty surrounding the global demand outlook.

Brent futures witnessed a drop of $1.44 or 1.7%, settling at $82.12 per barrel by 11:27 a.m. EST (1627 GMT). Additionally, the six-month spread for Brent on Tuesday reached its highest level since October, indicating a market that is becoming tighter.

In the case of US West Texas Intermediate (WTI) crude for April delivery, it fell by 70 cents, equivalent to 0.9%, to reach $78.49 per barrel. Earlier, it had pared $1. The March WTI contract experienced a gain of 36 cents or 0.45%, settling at $79.55 per barrel before its expiration during the session. Notably, there was no settlement for WTI on Monday due to a US public holiday.

The decline in crude prices was attributed to an overall "quiet trading" environment during the Presidents’ Day holiday in the US, coupled with ongoing geopolitical tensions in the Middle East. The UN has issued warnings about the potential for a significant humanitarian crisis if such an assault occurs.

The conflict in the Middle East has also affected shipping, with increased attacks on shipping lanes in the Red Sea and Bab al-Mandab Strait by Iran-aligned Houthis in support of Palestinians. Multiple vessels have been hit by drone and missile strikes since Friday, posing a threat to energy markets.

However, despite these geopolitical tensions in a major oil-producing region, concerns about declining global demand have weighed heavily on crude investors' minds. The situation in China has contributed to these worries, as the country announced its most substantial reduction in the benchmark mortgage rate on Tuesday. This move, exceeding analysts' expectations, did not elicit a more positive response from the crude market, underscoring the depth of oil demand problems in China.

The bearish sentiment in the oil market was further fuelled by a recent report from the International Energy Agency (IEA), which revised downward its 2024 oil demand growth forecast. The IEA estimated a growth of 1.22 million barrels per day (bpd) in global oil demand for this year, significantly lower than OPEC's more optimistic projection of 2.25 million bpd.

The divergence in forecasts between the IEA and OPEC is indicative of broader disagreements, particularly concerning the transition to renewable and cleaner energy. The IEA, representing industrialized countries, predicts that oil demand will peak by 2030, while OPEC anticipates continued growth in oil use over the next two decades. These conflicting perspectives contribute to the overall uncertainty and volatility in the oil market.

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