Oil prices are falling as the reality of weak global demand outweighs the risk of broader war in the Middle East

Global oil prices are falling sharply after a retaliatory attack by Israel last weekend targeted Iranian military sites instead of energy infrastructure as feared.

Crude oil prices rose globally on October 2 after Iran fired nearly 200 missiles into Israel, part of a series of rapidly escalating attacks between Israel and Iran and its Arab allies that threatened to push the Middle East closer to a region-wide war.

Iran is the world’s seventh-largest oil producer, but a wider conflict in the Middle East could impact some of the world’s largest energy producers in the region.

With many seeing that threat subsiding, at least in the short term, the price of U.S. crude oil and Brent crude, the international benchmark, plunged 6% on Monday. US crude fell well below $70 a barrel.

The Israeli military said its planes targeted facilities Iran used to fire the missiles at Israel, as well as surface-to-air missile sites.

Here’s a look at the current situation and outlook for oil and gas prices:

The short price increases end as weak demand takes center stage again

U.S. crude prices fell 6% on Monday after Israel’s retaliatory strike on Iran over the weekend targeted military sites rather than the oil fields of the world’s seventh-largest crude producer.

That puts the price of a barrel of US crude oil well below $70, after rising above $77 earlier this month. Oil and gasoline prices have each fallen sharply from their annual highs in April. According to energy analysts, a gallon of gasoline can be had for less than $3 at more than half of the pumps in the U.S.

The focus has returned to the fundamentals of global energy markets, which this year have been a story of ample supply and declining demand. One of the most important factors is the slowdown in economic growth in China, which is a huge energy consumer.

Beijing said this month that China’s economy grew at an annual rate of 4.6% in the July-September quarter, up from annual growth of 4.7% in the previous quarter and lower than the official target of “about 5%” growth for 2024.

Conflicts in the Middle East are still causing unrest in energy markets, just not as bad

Prices briefly rose this month after Iran sent missiles into Israel, but many experts view Israel’s response over the weekend as measured, potentially ending a cycle of retaliatory strikes from both sides, at least for now.

And the OPEC+ alliance, made up of members of the producer cartel and allied countries including Russia, has less influence on global prices than, for example, in the 1970s, when an oil embargo that followed the start of the Yom Kippur War in 1973 depressed oil prices quadrupled.

Global oil supply has changed radically since then, with the US becoming the world’s largest oil producer. Months of war between Israel and Hamas and Hezbollah, two Iranian allies, have done little to boost prices for OPEC and its twelve oil-producing countries. Only the possibility of a direct confrontation between Israel and Iran was decisive.

They are the basics

The long-term expectation is that oil prices will go lower, not higher. That’s because the balance between supply and demand has shifted toward supply, a dynamic that typically drives oil prices lower.

In its latest update on energy markets, the International Energy Agency said oil demand rose by the smallest amount since 2020 in the first half of this year. Meanwhile, supply has continued to increase and the OPEC+ alliance said it plans to release oil. More oil will come onto the market from December.

What’s going on with energy prices this year?

Oil futures rose rapidly at the start of the year, reaching $85 per barrel in April, but it was pretty much all downhill from there and prices at the pump followed suit.

U.S. gas prices loosely follow the price of crude oil, because the price of oil makes up half the cost of a gallon of gasoline. Between Friday and Monday, when Israel launched a measured counterattack in Iran, the price of a barrel of oil plummeted by $4.

OPEC has tried to set a floor for oil prices this year with little success.

Saudi Arabia and related oil-producing countries in June extended production cuts into next year, hoping to prop up sluggish prices, which have failed to recover even amid unrest in the Middle East and this year’s summer travel season.

At the same time, the US is pumping unprecedented amounts of crude oil. The U.S. Energy Information Administration expects average daily crude oil production in the United States to reach 13.2 million barrels per day this year, with production not expected to grow until 2025.

What’s next for oil and gasoline prices?

Some energy experts believe oil prices have peaked this year and will continue to erode, likely meaning more breaks for motorists.

“The limited nature of Israeli strikes on Iran should reduce fears of a broader war and remove some of the geopolitical premium on crude oil,” Tom Kloza, global head of energy analysis at the Oil Price Information Service, said this weekend. a post on social media. “The current average for US gas is $3.13/gal, with 55% of locations costing less than $3/gal.”

Kloza told the AP this month that 2025 looks even worse for oil producers, “with supply almost certainly exceeding demand by 500,000 to 1 million barrels per day.”

Gasoline prices are already falling with a week to go until the US presidential elections.

The national average price of $3.13 per gallon is down more than 4 cents from last week and as much as 37 cents per gallon from last year at this time, according to auto club AAA.

However, in many states, prices are well below the national figure. The average price for a gallon in Texas is $2.67 and many southern states are close to that. Prices in western states are much higher, including nearly $4.60 in California.