Oil prices edged higher on Wednesday as market participants responded to a notable drop in U.S. crude and gasoline inventories, coupled with growing concerns over the potential escalation of the Israel-Gaza conflict, which could disrupt global oil supplies.
By 0650 GMT, Brent crude futures had increased by 41 cents, or 0.5%, to $81.10 per barrel, while U.S. West Texas Intermediate (WTI) crude similarly rose by 41 cents, or 0.5%, to $78.76 per barrel.
Impact of U.S. Crude Inventory Data
The American Petroleum Institute (API) reported a significant drawdown in U.S. crude oil inventories, with a decrease of 5.2 million barrels for the week ending August 9. This decline was more than double the forecasted drop of 2 million barrels, indicating robust oil demand in the U.S., the world’s largest oil consumer. Gasoline inventories also fell by 3.69 million barrels, while distillates saw a slight increase of 612,000 barrels.
Danish Lim, an investment analyst at Phillip Nova, noted that the larger-than-expected drawdown underscores the ongoing strength in oil demand. However, Lim emphasized that geopolitical risks, particularly the possibility of an escalation in Middle East tensions, could provide significant upside pressure on oil prices in the coming weeks.
Geopolitical Risks and Market Concerns
The situation in the Middle East remains a critical factor influencing oil markets. Iran, a key oil producer, has threatened severe retaliation following the assassination of a Hamas leader late last month. While Israel has not confirmed its involvement, it continues military operations against Hamas in Gaza after the group’s attack on Israel in October. In response, the U.S. has bolstered its military presence in the region, deploying warships and a submarine.
Vivek Dhar, an analyst at Commonwealth Bank of Australia, highlighted the potential for the conflict to escalate into a broader regional confrontation. Such an escalation could directly impact Iran’s oil supply and infrastructure, with significant consequences for global oil markets. Iran accounts for approximately 3-4% of global oil supply, with 25-50% of its production destined for export.
ANZ Research further warned that a wider conflict could disrupt oil flows through critical chokepoints in the Middle East, threatening over 20 million barrels per day of oil with possible disruptions.
Limiting Factors: IEA Demand Forecast
Despite the upward pressure from geopolitical concerns and falling U.S. inventories, oil price gains were somewhat restrained by the International Energy Agency’s (IEA) recent report. The IEA maintained its 2024 global oil demand growth forecast but lowered its estimate for 2025, citing a weaker Chinese economy and its potential impact on consumption.
As the market continues to monitor these developments, the Energy Information Administration (EIA) is set to release official government data on U.S. crude inventories later on Wednesday, which could further influence oil prices.
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