Oil prices slide more than 3% to 7-month low on weak economic data and demand concerns

The US reported weak job numbers as Wall Street declined, stoking fears of a new recession, and global manufacturing activity softened

The funeral ceremony of Hamas leader Ismail Haniyeh in Tehran. Iran has threatened to retaliate, which could affect oil supply. AP

Oil prices settled lower on Friday and slid to its lowest levels in seven months on weak economic data from the US and China, and as demand concerns offset fears of a supply disruption caused by geopolitical tension in the Middle East.

Brent, the benchmark for two thirds of the world’s oil, plunged 3.41 per cent to at $76.81 a barrel. West Texas Intermediate, the gauge that tracks US crude, dove 3.66 per cent to $73.52 a barrel.

Oil was dragged by weak economic signals from the world's two top economies: the US reported weak job numbers as Wall Street declined, stoking fears of a new recession, and China's manufacturing sector softened.

"Crude futures were volatile but could remain under pressure ... driven by weaker global fuel demand. Disappointing economic data from China and reduced manufacturing activity across Asia, Europe, and the US have offset the rising geopolitical tensions in the Middle East," said Mazen Salhab, chief market strategist for the Middle East and North Africa at broker BDSwiss.

"The economic slowdown in the world’s largest oil importer, China, impacted negatively crude prices. Lower crude oil imports in China have further hurt demand prospects. Although there was stronger-than-expected US domestic oil demand for May, overall demand concerns overshadow these positive signs."

Crude prices swung after the killing of Hamas leader Ismail Haniyeh in Tehran, which has led to concerns of a wider regional conflict, before ultimately settling down to its lowest since January.

Iran claimed Israel was behind the assassination and threatened “harsh punishment” in retaliation.

“Unless an actual disruption occurs, which in the worst-case scenario could impact 15 per cent to 20 per cent of global exports, we see the current risk premium deflate within a relatively short period of time,” Ole Hansen, head of commodities strategy at Saxo Bank, told The National.

“An actual disruption, on the other hand, may initially send prices back towards $100 before potentially collapsing, given the impact on global economic growth, which is currently relatively fragile.”

While the market is on tenterhooks in gauging what next steps look like, in the absence of “an actual supply disruption, the geopolitical-led pop in oil prices historically tends to ebb out of the equation”, Japanese lender MUFG said.

Strong summer demand for transport and cooling, as well as limited production outside Opec+ will drive a supply deficit of 1.3 million barrels per day in the third quarter, which is expected to push Brent to $88 a barrel, it added.

Opec+ stuck to its production caps after an online meeting on Thursday but the crude producers’ group repeated that its policy of a gradual unwinding of cuts could be “paused or reversed”.

In June, the group announced a plan to gradually lift the additional voluntary production cuts of 2.2 million bpd by eight Opec+ member states from October 2024 to September 2025.

The producer alliance also agreed to extend output cuts of 3.66 million bpd, which were initially planned to end this year, until the end of 2025.

The Opec+ announcement came after oil prices suffered their biggest monthly loss since 2023 in July, amid growing concerns about fuel demand, particularly in China, the world's top crude importer and second-largest economy.

China is facing challenges with a real estate crisis, sluggish consumer spending and a deceleration in manufacturing.

The Asian country’s manufacturing activity fell to its lowest level in five months in July as factories struggled with decreasing orders and low prices, according to an official survey released this week.

Meanwhile, in the US, new unemployment benefit applications rose to an 11-month high last week, indicating a potential softening in the labour market and supporting the case for an interest rate cut in September.

Lower interest rates stimulate economic growth, boosting crude demand.

On Wednesday, Federal Reserve chairman Jerome Powell said the US central bank could cut interest rates as soon as September, nearly completing the Fed's policy cycle after leaving rates unchanged for about a year.

“We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate, but we’re not quite at that point,” he told reporters.

The Fed has maintained its target federal funds rate at a range of 5.25 per cent to 5.5 per cent.