Why is the Middle East so hot but oil prices are falling?

.Although the Middle East oil fields are at risk of catching fire due to the heat of war, the pressure from reduced energy demand has kept oil prices from 'boiling', even 'cooling' in the past week.

The Middle East is 'hot', oil prices are 'cooling'

. Queuing to buy fuel in Chennai, India. Rising oil prices will negatively impact oil-consuming economies

. Earlier this week, crude oil prices fell sharply due to the convergence of many factors that strongly affected market sentiment. Concerns about weak demand, especially from China, and the risk of easing supply in the Middle East are the two main causes of downward pressure on prices. This trend is forecast in the short term.

. Geopolitical risks

.Oil prices remained stable on October 21 after a slump last weekend, with Brent crude at around $73.49 a barrel and West Texas Intermediate (WTI) crude at $69.7 a barrel, according to Reuters. Last weekend, oil prices closed at $73.06 and $69.22 a barrel, respectively, after falling 7% this week.

. Geopolitical risks played a significant role in oil price fluctuations this week. The past few days have been the most tense and belligerent period in the Middle East since the outbreak of hostilities in Gaza a year ago.

. What is the purpose of the US Secretary of State's week-long visit to the Middle East?

The Middle East situation after Mr. Sinwar's killing: increased tension and conflict?

.Israel expanded its war against the Iran-backed Hezbollah group into Lebanon, leading to Tehran's missile attack on Israel in early October. Markets were on edge as Tel Aviv threatened to retaliate against Iranian oil facilities, disrupting global oil flows, sending oil prices up more than 9% the following week.

.After Israel killed Hamas leader Yahya Sinwar, Hezbollah said last weekend it was moving into a new phase and would escalate its fighting with Tel Aviv's military. The development dashed hopes that tensions would ease in the Middle East.

.However, investors were less nervous after reports that the US had persuaded Israel to avoid attacking Iran's oil infrastructure. On October 18, US President Joe Biden said he had a good idea of ​​when and how Tel Aviv would strike back, but he still saw an opportunity to resolve the conflict.

. "In my view and the view of my colleagues, there is a chance that we can deal with Israel and Iran in a way that ends the conflict for a period of time. That ends the conflict, in other words, stops the attack back and forth," Biden said, according to Reuters.

This news has significantly reduced the "war premium" and cooled oil prices.

Global picture . The easing of tensions in the Middle East coincides with a worrying assessment of global oil demand. A series of reports from major organizations such as the International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) have lowered their forecasts for global oil demand in 2024 and 2025, adding to the pessimistic outlook.

In the middle of this month, OPEC reduced its forecast for global demand growth to 1.93 million barrels per day for 2024, marking the third consecutive downward revision. Meanwhile, the IEA is even more pessimistic, forecasting demand growth of just 900,000 barrels per day next year.

   Countries around the world are grappling with economic challenges that are affecting energy consumption patterns. China's economy, the world's top oil importer, is growing at its slowest pace since early 2023. In addition, there is a significant shift in the country's transportation sector, with electric vehicle sales up a record 42% in August 2024.

   China's crude oil imports in the first nine months of this year fell 3%, according to Reuters. "China's data shows tentative signs of improvement, but recent press conferences on additional economic stimulus measures have left market participants unimpressed," Rishi Rajanala, an expert at Aegis Hedging, a strategic services firm, told Reuters.

   While demand is down, supply is expected to be abundant in the coming period. US crude oil production hit a record high of 13.5 million barrels/day, and increased production in some countries such as Brazil and Canada, further reassuring the market. "Currently, supply continues to flow, and if there are no major disruptions, the market will face a significant surplus in the new year," the Guardian quoted the IEA as saying. This will also act as a shock absorber in the event of an escalation of conflict in the Middle East.