Oil mixed on China’s struggle, Middle East tensions

Prices of crude oil mixed on the back of Chinese economic struggle that capped demand and escalating tension in the Middle East, which raise supply concerns.

The market has identified potential upside amidst ongoing conflicts in the Middle East and the expectation that increased economic activity in the world’s largest oil-consuming countries, the US and China, will boost oil demand.

Saudi Arabia plan to increase oil production from December could keep oil price surge in check, according to analysts.

Brent increased to $71.95 per barrel. However, US benchmark West Texas Intermediate (WTI) fell to $68.32 per barrel. Israeli airstrikes continue in several areas of southern and eastern Lebanon.

Meanwhile, analysts expect the employment-weighted data week to give clues about the US Federal Reserve’s (Fed) next steps and give more information about the course of the US economy.

The lower-than-expected inflation indicators in the US raised expectations that the Fed may now focus on supporting the labor market and continuing to cut interest rates.

While the expectation that the Fed will cut by 75 basis points by the end of the year remains strong, the expectations for a 50 basis point cut by the Fed in November recorded as 54%.

Interest rate cuts are expected to boost economic activity and oil demand. The expectation that the steps taken by China to increase economic mobility will positively affect the oil demand in the country supports the increase in prices.

Moreover, while the economic incentives announced by the government last week in China continue to reflect positively on the markets, the government has made statements that banks will reduce mortgage interest rates to solve the current problems in the housing sector.

On the other hand, expectations that Saudi Arabia, the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), will ramp up output from December in a bid to reclaim market share capped giants.

In June, the OPEC+ group, which includes OPEC members and other major producers like Russia, agreed to extend additional voluntary cuts of 2.2 million barrels per day until the end of September, with a gradual phase-out planned until September 2025.

Though, the country’s policy seems to have changed towards a supply hike as output surge from non-OPEC producers and weaker global demand offset the group’s efforts to keep prices higher.

Meanwhile, ING said in a noted that the oil market’s response to developments in the Middle East over the weekend has been somewhat muted.

The market has become increasingly numb to the tension in the region given that, after almost a year of conflict, there has still been no impact on oil production.

However, if Iran were to become more involved, this would increase the risk of oil supply disruptions. In addition, OPEC is sitting on a large amount of spare production capacity, which will also provide the market with some comfort.