Global oil prices have witnessed a significant decline following a retaliatory airstrike by Israel over the weekend, which targeted Iranian military installations instead of its oil infrastructure, alleviating fears of an escalating conflict. On October 2, crude prices surged after Iran launched almost 200 missiles into Israel, contributing to a rapid escalation of hostilities with Iran and its regional allies that raised concerns about a potential broader war in the Middle East.
Despite Iran’s status as the world’s seventh-largest oil producer, the immediate threat of widespread conflict appears to be receding, which has led to a sharp drop in the price of both U.S. benchmark crude and Brent crude, the international standard, falling by 6% on Monday. U.S. crude prices fell below $70 per barrel, down from over $77 earlier this month.
According to the Israeli military, the strikes aimed at facilities that Iran used for missile production and surface-to-air missiles. In light of these developments, the market outlook for oil and gas prices is examined:
Following a brief increase, oil prices have retreated as concerns about low demand return to the forefront. U.S. benchmark crude plummeted 6% on Monday after Israel’s airstrike targeted military sites, allowing crude oil prices to drop below $70 a barrel. This was a reversal from the earlier rise above $77 this month. Gasoline prices also saw a decline, with many stations in the U.S. offering gas for less than $3 per gallon, according to analysts.
The focus has shifted back to the core dynamics of the global energy markets, where ample supply combined with decreased demand has been the narrative for this year. A key factor influencing this is the sluggish growth of the Chinese economy, a major consumer of energy. China’s economy recorded a 4.6% annual growth rate for the third quarter, a slight decrease from the previous quarter and below the government’s target of approximately 5% growth for 2024.
Despite the ongoing tensions in the Middle East, the oil market does not seem to be experiencing the volatility it once did. Although oil prices spiked briefly following Iran’s missile strikes, experts believe Israel’s recent measured response could signal an end to an escalation of retaliatory attacks, at least for the time being. The influence of the OPEC+ coalition over global prices has also waned significantly compared to the 1970s, when geopolitical events had a direct and substantial impact on pricing.
The long-term forecast suggests that oil prices are likely to continue on a downward trend. This expectation is driven by a supply-demand imbalance that favors supply, a situation typically associated with falling prices. The most recent insights from the International Energy Agency indicate that oil demand rose at its slowest rate since 2020 during the first half of this year, while supplies have steadily increased. The OPEC+ coalition has also announced plans to boost oil output starting in December.
This year has seen oil futures increase sharply early on, peaking at $85 per barrel in April before declining. Gas prices generally mirror crude oil prices, as oil comprises a significant portion of gasoline costs. Between Friday and Monday, during which time Israel carried out its airstrike, the price of oil dropped by $4 per barrel.
Efforts by OPEC to stabilize prices have met limited success this year. In June, Saudi Arabia and other oil-producing allies extended production cuts into the next year in an attempt to bolster prices that have been unresponsive even in the face of geopolitical unrest and the summer travel season. Additionally, U.S. oil production is at unprecedented levels, with the U.S. Energy Information Administration projecting an average daily output of 13.2 million barrels in 2023, with expectations for continued growth into 2025.
The outlook for both oil and gasoline prices suggests that they may have peaked for the year, with experts anticipating continued declines, which could provide relief for consumers. Energy analyst Tom Kloza remarked that the limited scope of Israeli actions against Iran should ease concerns about a wider conflict, reducing the geopolitical premium on crude oil prices. The average price of gasoline in the U.S. is currently $3.13 per gallon, with a significant percentage of locations offering it for under $3.
As the election approaches, gasoline prices continue to decrease, with the national average falling over 4 cents from the previous week and down 37 cents from the same period last year, according to AAA. However, prices vary widely by region, with Texas averaging $2.67 per gallon and several Southern states close to that figure, while Western states see much higher prices, including nearly $4.60 per gallon in California.