Oil Prices Drop as War Premium Evaporates

Crude oil prices slumped today following the news that Israel had accepted a proposal aimed at solving disagreements on a plan for ceasefire in Gaza.

Brent crude dropped below $78 per barrel in midmorning Asian trade and West Texas Intermediate slipped below $74 per barrel earlier in the day, with little in the way of bullishness to arrest the slide.

“Prices seem to find some headwinds from geopolitical developments in the Middle East and China’s demand outlook,” IG strategist Yeap Jun Rong told Reuters. “A ceasefire deal in Gaza now seems more likely than not, which saw market participants pricing out the risks of geopolitical tensions on oil supplies disruption,” he added.

“Lingering Chinese demand concerns have been the key driver weighing on sentiment,” said Warren Patterson, ING’s head of commodities strategy, said as quoted by Bloomberg. “Now the potential for an Israel-Hamas cease-fire has only provided further downward pressure.”

Concern about oil demand in China has become the leading bearish factor on the oil market this year. The country, as the world’s biggest oil importer, is seen as a weathervane for global demand trends and trading decisions are often made based on the latest data out of Beijing.

In this case, the latest data has shown declines in both crude oil imports and fuel exports, along with a slew of economic reports that revealed developments falling short of expectations and as such being perceived as suggestive of a weakening economic growth and, by extension, oil demand.

“Trade and industrial output numbers last week suggested that apparent oil demand continued to trend lower in July,” ING’s Patterson and Ewa Manthey said in a note. “These worries mean that speculators continue to be hesitant about jumping into the market, despite expectations for a deficit environment for the remainder of the year.”