Oil Price Collapse Halted by Tensions in the Middle East

Brent crude and U.S. benchmark WTI fell by more than 3% on Friday and then continued to drop on Monday morning amid growing fears of a U.S. recession. The drop in oil prices has now been somewhat tempered by rising tensions in the Middle East.

At 10:30 a.m. ET on Monday, Brent crude was trading down 0.86% at $76.15, while West Texas Intermediate (WTI) was trading down 1.03% at $72.76.

Recession fears took charge early on Monday morning, with analysts largely determining that without swift U.S. interest rate cuts, economic growth will suffer and significantly impact oil and gas demand. This fear adds to concerns about weak Chinese demand. 

Oil has been taking a hit since Friday's jobs report, which was weaker than expected, continuing to add to four straight weeks of declines, with last week's sell-off proving the "most aggressive" since early May, according to a Monday note from ING. 

The Middle East conflict, at this point, is the only thing keeping oil prices from a more significant downward spiral, with ING noting that observers are now waiting to see what Iran's response will be to Israel's assassination on Iranian territory of the Hamas political leader last week. 

However, short of an all-out conflict that disrupts global oil supplies, the Middle East can only serve as a soft counterbalance, with supplies expected to rise later this year as OPEC+ works toward phasing out voluntary output cuts beginning in October. However, OPEC output rose in July despite cuts, Reuters said in a survey published on Friday. 

"While developments may lead to short-term volatility in the market, to see sustained strength, we would likely need to see some actual disruption to oil supply, which has been lacking so far," ING wrote on Monday. 

For now, geopolitical risk is keeping prices from diving, but bearish sentiment will continue to weigh on prices until the global economy gets back on track.

Also on Monday, Saudi Arabia raised its selling price for Arab Light oil to Asia by $0.20/bbl to US$2/bbl for September loadings, following two weeks of price cuts. The price rise, which comes amid reports of weakening China demand, suggests that Aramco may see stronger demand elsewhere in Asia, or that it views the China demand picture differently, lending some optimism to alternative scenarios.

By Charles Kennedy for Oilprice.com

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