Oil price: Steady on Israel-Hezbollah conflict on China fears

• Israel launched a ground offensive against Hezbollah targets in southern Lebanon on Tuesday.
• Despite significant oil production from the Middle East, crude oil prices were little changed.
• Slowing Chinese crude demand growth and economic struggles dampen sentiment in the oil market.

Israel launched a ground offensive against Hezbollah targets in southern Lebanon on Tuesday in a marked escalation of Middle East tensions – and energy markets largely shrugged their shoulders.

The indifference is significant because the Middle East is a major producer of crude — pumping a third of the world’s supply — so any geopolitical tensions in the region could cause some kind of significant price gain.

This time, the price of oil rose a little.

At 2:14 a.m. ET. Benchmark US West Texas Intermediate futures were 0.19% higher at $68.32 a barrel.

Notably, the gains followed a 17% drop in Brent and a 16% drop in US WTI futures. during the third quarter of the year, when traders were on the edge of bullish price action amid developments in the Middle East.

The reason is not rocket science. It’s mostly China — the world’s largest importer of crude oil.

“The main cause of bearish sentiment has been a steady slowdown in crude oil demand growth, particularly in China,” Henning Gloystein, head of the energy, climate and resources practice at Eurasia Group, wrote last month.

The world’s second-largest economy has struggled to mount a convincing recovery from the pandemic and is grappling with multiple challenges, including the property crisis, high youth unemployment and deflation.

Beijing rolled out an economic stimulus package last week that massively boosted sentiment in China’s previously depressed stock markets, but most analysts say the measures are not enough to turn things around on the ground.

Even Chinese leader Xi Jinping acknowledged the scale of China’s problems in the country’s National Day speech on Monday, saying the road ahead will not be smooth.

BMI, a research firm, wrote last week that short positions in Brent exceeded long positions for the first time in early September.

“Market sentiment is already weak, with a bearish macro narrative weighing heavily to the downside, and investors are currently far more receptive to bearish price drivers than bullish ones,” BMI analysts wrote.

Sentiment toward China was so weak that Saudi Arabia almost threw in the towel to push oil higher.

The kingdom — which is the world’s biggest crude exporter and the de facto leader of OPEC — is abandoning its $100-a-barrel price target and is ready to increase oil production, the Financial Times reported last week.

This means that Saudi Arabia is looking to gain a larger market share rather than aiming for higher profit margins by curtailing production.

That would be a major policy shift as Saudi Arabia leads OPEC and the group’s allies, including Russia, in maintaining oil supply cuts from the end of 2022.

Despite downward pressure on oil prices, things could change quickly if geopolitical uncertainty continues to rise in the Middle East.

The U.S. could also provide some support to the market as crude inventories hit a two-and-a-half-year low as of Sept. 20, the latest data available.

“Yes, it’s true that traders are concerned that Chinese oil demand has not yet returned to a level that can prompt OPEC to stop expanding supply cuts,” wrote Naeem Aslam, CIO at Zaye Capital, based in London. The markets.

“However, the fact that US oil stocks are drawing down faster indicates that oil demand in the world’s largest economy is moving in the right direction, which is positive for price action,” Aslam added.