Oil prices fell after their largest surge in more than nine months, as indications of a slowing US economy outweighed fears that the conflict in the Middle East might disrupt supplies. West Texas Intermediate (WTI) crude dropped 2.1%, reversing earlier gains to settle below $77 a barrel. This decline follows a significant 4.3% rally on Wednesday, the biggest daily gain since October.
The market’s retreat from risk assets on Thursday was triggered by data showing that US manufacturing activity shrank the most in eight months, heightening concerns about weakening crude demand. Concurrently, a report about Iran’s plan to retaliate against Israel for the killing of a Hamas leader on Iranian soil has raised fears that the conflict might escalate into a broader war involving the US and Iran, potentially affecting crude exports.
Dennis Kissler, senior vice president for trading at BOK Financial Securities, commented that while geopolitical tensions “definitely deserve market respect,” the recent rally in oil prices seems overdone. He emphasized that until there is an actual disruption in global supply, the market’s reaction appears overextended, especially given the signs of a global economic slowdown.
Reports indicate that Iran’s Ayatollah Ali Khamenei ordered a direct strike on Israel, following claims that Israel assassinated a Hamas political leader in Tehran and a senior Hezbollah member in Beirut. Amid these rising tensions, US officials are advocating for a cease-fire in Gaza. However, the situation has become more complex following the death of Hamas’ political leader Ismail Haniyeh, who was a key figure in the negotiations.
In recent months, geopolitical turmoil has sparked increased activity in the oil options market. Wednesday saw the highest call volumes since April, with traders paying a rare premium for these contracts over bearish ones. This escalation coincides with a review meeting by key members of the Organization of the Petroleum Exporting Countries (OPEC) and its allies, which made no new recommendations on output policy. The group had previously announced plans to gradually restore output starting in October but reiterated its readiness to pause or reverse the move if necessary.
Despite the monthly decline in July, crude prices remain higher this year. Concerns over demand from top importer China have grown, with recent data showing an unexpected contraction in manufacturing. The bullish sentiment has been driven by Middle East tensions, OPEC curbs, and expectations of monetary easing boosting US demand. Federal Reserve Chair Jerome Powell indicated on Wednesday that an interest-rate cut could occur as early as September.
