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

Global oil prices are plummeting after Israel’s retaliatory strike over the weekend, which targeted Iranian military facilities rather than energy infrastructure, as feared.

Oil prices rose around the world on October 2 after Iran fired nearly 200 missiles at 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 war in the region.

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

As many see this threat fading, at least in the near term, the price of U.S. crude oil and Brent crude, the international benchmark, fell 6% on Monday. US crude oil has fallen well below $70 a barrel.

The Israeli military said its planes targeted facilities from which Iran fired missiles at Israel, as well as sites where surface-to-air missiles were located.

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

The short price spike will end when weak demand takes center stage again

The price of U.S. crude oil fell 6% on Monday after Israel’s weekend retaliatory attack on Iran, which targeted military facilities rather than the oil fields of the world’s seventh-largest oil producer.

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

Attention has returned to the fundamentals of global energy markets, which have seen strong supply and falling demand this year. The main factor slowing down economic growth in China, which is a huge energy consumer.

Beijing said this month that China’s economy expanded at an annual rate of 4.6% in the July-September quarter, down from annual growth of 4.7% in the previous quarter and falling short of its official growth target of “around 5%” for 2024.

The conflict in the Middle East continues to shake energy markets, although to a lesser extent

Prices rose briefly this month after Iran sent missiles toward Israel, but many experts believe Israel’s response over the weekend is measured, potentially ending, at least for now, the cycle of retaliatory attacks from all sides.

In contrast, the OPEC+ alliance, made up of members of the cartel of producers and allied countries, including Russia, has less influence on global prices than in the 1970s, when the oil embargo imposed after the start of the Yom Kippur War in 1973 caused oil prices to quadruple .

Since then, global oil supplies have changed dramatically, and the United States has become the world’s largest oil producer. Months of war between Israel and Hamas and Hezbollah, Iran’s two proxies, have done little to raise prices for OPEC and its 12 oil-producing countries. Only the possibility of a direct confrontation between Israel and Iran moved the needle.

These are the basics

Oil prices are expected to fall, not rise, in the long term. This is because the balance between supply and demand has tipped towards supply, and this dynamic typically causes oil prices to decline.

In its latest update on energy markets, the International Energy Agency said oil demand in the first half of this year rose at its smallest rate since 2020. Meanwhile, supplies continue to grow and the OPEC+ alliance said it plans to release more oil to the market since December.

What’s happening with energy prices this year?

At the beginning of the year, crude oil futures rose rapidly and reached USD 85 per barrel in April, but since then prices have almost dropped and gas station prices have followed suit.

U.S. gas prices loosely track oil because the price of oil is half the price of a gallon of gasoline. Between Friday and Monday, during which Israel launched a measured counterattack on Iran, the price of a barrel of oil fell by $4.

OPEC tried to set a floor for oil prices this year, but was unsuccessful.

Saudi Arabia and allied oil-producing countries in June extended production cuts into next year, hoping to shore up stagnant prices that have failed to rebound even amid turmoil in the Middle East and this year’s summer travel season.

At the same time, the United States is pumping unprecedented amounts of oil. The U.S. Energy Information Administration expects average daily crude oil production in the United States this year to be 13.2 million barrels per day and expects production to increase only in 2025.

What’s next for oil and gasoline prices?

Many energy experts believe oil prices have peaked this year and will continue to fall, likely meaning more breaks for drivers.

“The limited nature of Israeli attacks on Iran should reduce fear of a wider war and reduce some of the geopolitical premium for oil,” Tom Kloza, global head of energy analysis at the Oil Price Information Service, said on social media over the weekend. “Today’s average U.S. retail gas price is $3.13 per gallon, with 55% of locations having retail gas prices of less than $3 per 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 a day.”

Gasoline prices are already falling and there’s a week left until the US presidential election.

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

However, in many states, prices are significantly lower than national prices. The average price per gallon in Texas is $2.67, which is similar to the price in many southern states. Prices in Western states are much higher, including in California at nearly $4.60.