LONDON (ICIS)–A two-decade low for US gasoline consumption in September has added to evidence of crude demand destruction in the face of efficiency gains and economic torpor, but the oil markets are following the latest outbreak of hostilities in the Middle East, the International Energy Agency (IEA) said.

The conflict between Israel and Hamas that has seen a blockade against the power, water and fuel to Gaza until hostages are released, according to Israel’s Minister for Energy on Thursday, following a wave of attacks in Israeli towns.

The crisis has yet to have any direct impact on oil flows, according to the IEA, despite reports that Israel’s Ashkelon oil port is currently shut to tankers. Markets are closely monitoring developments, particularly if it should spill out to countries such as Iran.

“A sharp escalation in geopolitical risk in the Middle East, a region accounting for more than one-third of the world’s seaborne oil trade, has markets on edge,” the IEA said in its monthly oil outlook.

Buoyed by easing sanctions, Iran is currently on track to be the second-largest source of crude supply growth this year after the US, according to the IEA, although if it becomes formally embroiled in the escalating conflict, that could shift.

Crude prices, which had risen to the high $90s/bbl in late September for benchmark Brent in the wake of fresh Saudi Arabia and Russia production cuts and supply tightness fears, have relaxed since then, falling around $12/bbl in the space of a few weeks.

Oil prices rose over $3/bbl in the immediate wake of the Hamas attacks and retaliatory Israeli missile strikes but lost most of those gains over the course of the week, and fell back to the mid-$80s/bbl despite some uplift from hopes of an end to interest rate hikes in the US.

Despite the stresses on global supply from production cutbacks and geopolitical tensions, fundamentals remain bearish, the IEA said, amid US gasoline lows and weaker emerging market demand.

“Demand destruction has hit emerging markets even harder, as currency effects and the removal of subsidies have amplified the rise in fuel prices,” the IEA added.

Consumption remains more robust in India, Brazil and China, with the latter expected to account for 77% of global demand growth this year, which the IEA projects at 2.3m bbl/day on average, a slight uptick from forecasts last month.

The IEA maintained that demand growth in 2024 will average 900,000 bbl/day, a sharp divergence from the OPEC projection which forecasts average demand growth of 2.2m bbl/day next year. The cartel is expected to release its latest forecast on Thursday.

The IMF this week cited commodity price volatility as one of the big downside risks for global economic growth, but shaky fundamentals may exert the strongest pull on crude pricing despite the current unrest, the IMF added.

“Rising prices focused the market’s attention on the prospect that ‘higher for longer’ interest rates could slow economic and demand growth,” it said.

Thumbnail image shows chimneys of a power station on the coast of Ashkelon, Israel taken in February 2023 (image credit: Majdi Fathi/NurPhoto/Shutterstock)

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