Oil's geopolitical risk premium fades as Israel-Gaza ceasefire talks progress

Both the benchmarks, Brent and WTI, have fallen by nearly 3 per cent this week

Brent has dropped about 15 per cent since reaching $91 a barrel in April, due to concerns over weakening demand, particularly in China. Getty

The geopolitical risk premium in oil markets, tied to the potential for a broader conflict in the Middle East, is fading, analysts have said, after oil recorded three consecutive days of declines.

Crude futures steadied in volatile trading amid rising prospects of a ceasefire in the Israel-Gaza war and a weakening demand outlook in China.

Brent, the benchmark for two thirds of the world's oil, was trading 0.32 per cent higher at $77.45 a barrel at 4.50pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 0.31 per cent at $73.40 a barrel.

Brent has lost about 6 per cent of its value since rising above $82 a barrel on Monday last week. WTI has dropped by 8.5 per cent during the same period.

Both Brent and WTI have fallen by nearly 3 per cent since the start of this week.

“The oil market’s recent poor form is continuing this week as a ceasefire in Gaza grows more likely and China demand weakness shows little sign of recovery,” said Svetlana Tretyakova, senior analyst at Rystad Energy.

“Despite ongoing ceasefire negotiations, clashes between Israel and Hamas continue, and the markets will remain highly sensitive to any developments in the region.”

Israel has accepted a “bridging proposal” presented by the US to address disagreements hindering a ceasefire deal in Gaza, US Secretary of State Antony Blinken said on Monday.

The focus has shifted to getting Hamas on board and finalising implementation details, Mr Blinken said.

Hamas, meanwhile, said on Tuesday that the latest proposal overturns what it had agreed to, accusing the US of yielding to new conditions from Israel.

Brent has dropped about 15 per cent since reaching $91 a barrel in April, due to concerns over weakening demand, particularly in China, the world’s largest crude importer, and easing supplies.

“Fundamental signals from the oil market are mixed. Data from China’s economy continues to underwhelm – industrial production extended its slowdown into July while construction activity has also been easing,” said Edward Bell, head of market economics at Emirates NBD.

Earlier this month, the International Energy Agency lowered its oil demand growth forecast for 2025, citing weakness in Chinese crude imports.

The IEA now expects global oil consumption to grow by 950,000 barrels per day next year, down 30,000 bpd from its previous forecast.

Investors are also looking for signals regarding the US Federal Reserve's next interest rate decision.

Calls for the US Federal Reserve to cut interest rates intensified this month after a disappointing jobs report raised fears of a recession in the world’s largest economy and triggered a sudden but brief market sell-off.

“Although inflation is cooling, it does not warrant immediate changes in the Fed policy. Discussions on rate cuts may arise in September, but any adjustments will likely be gradual,” said Ms Tretyakova.

“In the energy sector, potential rate cuts could have mixed effects.”

Lower interest rates reduce borrowing costs for businesses, boost economic growth, and typically increase oil demand.

Opec+ cuts

The alliance of oil-producing countries plans to gradually lift voluntary production curbs of 2.2 million bpd on a monthly basis from October 2024 to September 2025.

However, Opec+ has said that the monthly increases in output could be “paused or reversed” depending on market conditions.

“If the market fundamentals don’t break this bearish trend soon, Opec+ may be hesitant to unwind their voluntary cuts anytime soon,” Ms Tretyakova said.

In its August report, the IEA warned that the oil market might face an oversupply in 2025 if Opec+ follows through with its plan to reintroduce additional barrels to the market.

Even if those cuts remain in place, global crude stocks could build by an average 860,000 bpd next year, the agency said.

“The producers’ alliance may need to temper their plan to increase production to forestall an expected surplus … but this strategy may arguably be already priced into the market,” Mr Bell said.

“Any public dispute among Opec+ members on where to take production from here could spark a more meaningful downside slump for oil,” he added.

The group’s total supply cuts of 5.86 million bpd represent about 5.7 per cent of global crude demand.