Oil Prices Settle 2% Lower as Economic Fears Eclipse Geopolitical Risks

Oil prices settled about 2% lower on Thursday, retreating from multi-week highs as macroeconomic headwinds took precedence over ongoing supply disruptions. Investor focus shifted to the potential for rising inflation and subsequent interest rate hikes to dampen global energy demand, overshadowing the immediate risks posed by conflict in the Middle East.

International benchmark Brent crude futures fell $1.72, or 2.2%, to settle at $76.30 a barrel. U.S. West Texas Intermediate (WTI) crude declined by $1.44, or 2.0%, to close at $72.08 a barrel, according to a Reuters report.

Demand Concerns Mount

The market's bearish turn was fueled by signs of economic strain in major economies. In the U.S., minutes from the Federal Reserve’s June meeting revealed growing concerns among policymakers about inflation. The prospect of tighter monetary policy to control prices can slow economic growth and, consequently, reduce demand for oil.

Adding to these concerns, new data from China showed that producer price inflation surged in June to its highest level in four years. This puts pressure on the manufacturing sector in the world's second-largest economy and top oil importer, signaling potential weakness in domestic demand.

Geopolitical Tensions Fail to Buoy Prices

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The price drop occurred despite an escalation in the U.S.-Iran conflict, which threatens flows through the critical Strait of Hormuz. The waterway, which previously handled about 20% of global oil supplies, has seen its reopening delayed by military actions, including Iranian attacks on U.S. infrastructure and U.S. strikes on Iran.

According to analysts at Goldman Sachs, oil flows from the Persian Gulf had recovered to over 80% of pre-war levels but have since retreated to the low-70% range following recent attacks. However, some market participants believe the tensions may be short-lived. Analysts at Mizuho noted that Iran appeared to be seeking diplomatic channels to de-escalate, which may have tempered the market's supply risk premium.

Other Supply Factors

Elsewhere, supply-side events continued to develop. Ukraine's military reported new drone strikes on Russian tankers in the Sea of Azov as it seeks to disrupt fuel supplies for Russian forces.

The previous day, U.S. diesel futures saw a significant spike after Russia announced a ban on its exports of the fuel. While this highlights ongoing tightness in refined product markets, the broader crude market on Thursday was driven more by the outlook for global demand.