Oil prices drop nearly 5% on reports Israel will not attack Iranian energy facilities

Slowdown in crude demand continues to weigh on the market

Ballistic missiles fired by Iran, seen from Tel Aviv, on October 1. Israel has pledged to retaliate for the attack. Reuters

Live updates: Follow the latest on Israel-Gaza

Oil prices plunged on Tuesday morning after reports that Israeli Prime Minister Benjamin Netanyahu had told the US his military would not attack nuclear or oil facilities in Iran eased supply concerns.

Brent, the benchmark for two thirds of the world's oil, was trading 4.75 per cent lower at $73.78 a barrel at 1.51pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 4.92 per cent at $70.20 a barrel.

Crude has sharply repriced geopolitical risk, with “energy traders continuing to unwind hedges placed on the threat of Iranian oil supplies being affected in the process”, said Chris Weston, head of research at online broker Pepperstone.

“The demand side of the equation also seems to be in play, with Opec projecting weaker demand forecasts.”

Mr Netanyahu agreed to limit his country’s retaliation against Iran for the October 1 missile attacks on Israel to military targets, the Washington Post reported on Monday. The newspaper quoted an official as saying the response would be calibrated to avoid the perception that Israel was interfering in next month’s US election.

“‏We listen to the opinions of the United States, but we will make our final decisions based on our national interests,” Mr Netanyahu's office said, in a statement that was also quoted in the Washington Post article.

Brent had soared following Iran’s ballistic missile attack on Israel, but most of those gains have been erased as demand concerns over slowing Chinese growth have overshadowed supply fears.

However, the oil market remains “highly influenced by geopolitical tensions at the moment, and on news on how Iran will respond to recent attacks”, said Giovanni Staunovo, strategist at UBS.

“I still believe the market should retain a geopolitical risk premium, considering that we need to see first [what] the Israeli response looks like and how Iran might respond to that at a later stage,” he told The National.

“Generally, I continue to expect Brent to move back above $80 per barrel as the oil market remains undersupplied.”

Lower demand

The drop in prices comes after producers' group Opec on Monday lowered its forecast for global oil demand growth in 2024 and 2025 for the third consecutive month.

In its oil market report, the group lowered the demand growth forecast for this year by 106,000 barrels per day to 1.9 million bpd, citing slightly reduced expectations for crude consumption in several regions. Opec also revised its forecast for next year down by 102,000 bpd to 1.6 million bpd.

The latest forecast cut comes as China's crude consumption shows signs of decline, which analysts attribute to both a slowing economy and a long-term shift towards the use of electric vehicles.

The country has this year announced several stimulus measures to address slowing manufacturing, a property market downturn and rising unemployment.

Last month, China’s central bank unveiled its largest economic stimulus package since the Covid-19 pandemic, including a reduction in its key short-term interest rate, a lowering of mortgage rates for existing housing loans and a one trillion yuan ($141.16 billion) liquidity injection.

Opec said China’s stimulus plan to revive its economy, the second-largest in the world, will support crude consumption. “In 2025, the positive impact of government fiscal stimulus introduced in September 2024 is expected to take hold,” the group said.

Meanwhile, the International Energy Agency expects world oil demand to expand nearly 900,000 bpd this year and close to 1 million bpd in 2025, marking a “sharp slowdown” on the roughly two million bpd over the 2022-2023 post-pandemic period, it said in its monthly report on Tuesday.

Chinese oil demand is “particularly weak”, with consumption dropping by 500,000 bpd year-on-year in August – its fourth consecutive month of declines.

“China underpins the deceleration in growth, accounting for around 20 per cent of global gains both this year and next year, compared to almost 70 per cent in 2023,” the IEA said.

Despite geopolitical risks, the market is likely to face a supply glut, according to the report.

“Heightened oil supply security concerns are set against a backdrop of a global market that – as we have been highlighting for some time – looks adequately supplied,” it said.

“For now, supply keeps flowing, and in the absence of a major disruption, the market is faced with a sizeable surplus in the new year.”