Oil prices rebounded after experiencing a two-day decline, driven by rising concerns over a potential Iranian retaliation against Israel and robust U.S. economic data that alleviated some worries about demand. West Texas Intermediate (WTI) crude surged over a dollar, closing above $78 a barrel, following a more than 3% drop in the previous sessions. The gains were supported by a hopeful sentiment in equity markets, as strong U.S. retail sales figures highlighted the ongoing resilience of the largest economy worldwide.
Market Reactions to Iranian Developments
Market participants are closely monitoring developments regarding Iran’s likely response to the assassination of a senior Hamas leader within its territory. Meanwhile, Israel has initiated discussions with international mediators concerning a proposed agreement to halt the extended conflict in Gaza. However, slow progress in these negotiations has kept crude investors anxious, contributing to a sustained risk premium in oil prices.
China’s Disappointing Demand Figures
On the other hand, disappointing oil demand figures from China revealed an 8% year-on-year decline in apparent oil demand for July, raising concerns about weaker consumption in Asia’s largest economy. Compounding these worries, recent data from the U.S. Energy Information Administration indicated an increase in crude inventories. This trend indicates a mixed outlook, although WTI’s prompt spread nevertheless strengthened to $1.18, suggesting that traders still view supply conditions as tight, especially as stocks continue to decrease at the crucial storage hub in Cushing, Oklahoma.
Historically, as the Northern Hemisphere’s summer driving season draws to a close, oil demand tends to ease. However, it’s not uncommon for prices to rebound afterward, particularly in light of Middle Eastern tensions now acting as a catalyst. According to Jay Hatfield, CEO of Infrastructure Capital Advisors, this dynamic coupled with a momentum-driven approach in markets may support price increases in the near term.
Despite today’s price rebound, crude oil remains about 7.5% lower than its peak last month due to pessimistic consumption forecasts in China influenced by an uptick in cleaner fuel usage.
U.S. Refinery Operations Slow, Raising Glut Concerns
In a somewhat alarming sign for the global oil market, several major U.S. oil refiners are reducing operations at their facilities, which could deepen fears of an impending crude oversupply. Marathon Petroleum Corp., which operates the largest refinery in the U.S., plans to run its 13 plants at an average of just 90% capacity this quarter—marking the weakest performance for that time frame since 2020. PBF Energy Inc. also indicated it would process its lowest amount of crude in three years, while Phillips 66 and Valero Energy Corp. anticipate similar reductions.
Outlook for Global Crude Production
The combined throughput of these four refiners represents roughly 40% of the U.S. capacity for gasoline and diesel production, making their operational cutbacks a significant factor to monitor. This downturn in refining activity occurs against a backdrop of stagnating fuel consumption and shrinking profit margins. Analysts suggest that this could lead to an oversupply of crude as refineries face compressed margins, which may prompt another wave of extensive maintenance during the fall.
Vikas Dwivedi, a global oil and gas strategist at Macquarie, believes that falling refining margins could trigger maintenance shutdowns throughout U.S. facilities, resulting in increased crude stockpiles. This development is particularly concerning against a backdrop of increasing global crude production, including new capacity additions.
As new refineries come online, global crude output is expected to rise, despite a potential increase in production output by OPEC+ nations later this year. Guyana’s production ramp-up and other new facilities poised to begin operations contribute to a fundamental shift in markets, which may lessen the impact of geopolitical tensions on crude prices. Dwivedi anticipates benchmark Brent oil prices averaging $75 a barrel in the fourth quarter, with further drops expected by the second quarter of the following year.
Market sentiment appears increasingly cautious regarding the continuation of the geopolitical premium in crude pricing, showing the disconnect between risk and actual supply disruptions, a trend that may continue as production rises.
