On October 28, 2023, at 10:00 PM EST, a significant downturn was witnessed in international oil prices, marking one of the steepest declines in two yearsThe price for West Texas Intermediate (WTI) crude for December delivery plummeted by $4.4, settling at $67.38 per barrel, which is a reduction of 6.13%. Similarly, the Brent December crude futures dropped by $4.63 to end at $71.42 per barrel, experiencing a 6.09% decline.

In the moments following this fall, a slight recovery commenced in the futures market, with WTI crude futures showing a minimal increase of 0.54%, now trading at $67.92 per barrel, while ICE Brent has also risen by 0.59%, now priced at $71.59. This fluctuation signals ongoing volatility in market reactions to geopolitical tensions and economic forecasts globally.

Looking ahead, analysts at Citigroup revised their outlook for Brent oil prices downward on the same day, acknowledging that the risk premium driven by Middle Eastern geopolitical tensions is gradually dissipating.

Backdrop of Geopolitical Conflicts

So, what led to this drastic drop in oil prices? Industry experts largely attribute this sudden shift to the continuing geopolitical conflicts in the Middle East.

On October 1st, in a bold act, Iran launched approximately 200 missiles towards Israel

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Subsequently, Israeli Prime Minister Benjamin Netanyahu publicly condemned these actions, asserting that Iran had made a grave mistake and would face consequences.

Analyst Guo Yanpeng from Zhonghui Futures indicated that the market's concerns regarding the Iranian-Israeli conflict stem from two primary sourcesFirst, Iran is a major oil producer in the Middle East, with an expected production capacity of 3.32 million barrels per day by September 2024, coupled with daily export volumes averaging around 1.7 million barrelsSecond, there are ongoing apprehensions regarding Iran potentially blocking the Strait of Hormuz, a crucial artery for global oil transport, responsible for about 21 million barrels per day—equating to roughly one-fifth of worldwide consumption.

Following Israel's retaliation against Iranian military positions on October 26, the geopolitical premium in oil prices began to recede

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Guo pointed out that the strikes were relatively restrained, focusing primarily on military assets while avoiding critical infrastructure like Iran's nuclear facilities or oil fields.

Liu Shunchang, a chemical analyst at Nanhua Futures, remarked that the panic in international oil markets was mainly alleviated due to the less aggressive nature of Israel's military actionsThis more measured response significantly eased market concerns surrounding Iranian crude oil supply and export potential, thereby leading to declining oil prices.

Moreover, Tian Meng from Zhongtian Futures pointed out that there are additional factors contributing to the drop in oil pricesThe first factor is the significant supply of crude oil within the United States, which holds more reserves than any other nation

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There are strategic economic movements leaning towards easing interest rates while simultaneously increasing oil and gas exploration through reduced regulationsThis is anticipated to provide a more stable economic environment, encouraging preemptive trading activity and anticipating U.Soil production increases.

The second factor at play involves a forecasted increase in crude oil exports from the Black Sea CPG mix as operations resume at the Kashagan oil field, expected to raise export volumes from around 1.07 million barrels per day in October to an estimated 1.42 million barrels per day in November.

Forecasting Lower Prices Ahead

What does this imply for the future trajectory of international oil prices? Analysts remain concerned about the sustainability of this decline.

On October 2, Citigroup analysts lowered their predictions for Brent crude oil prices, citing a waning risk premium arising from geopolitical tensions in the Middle East

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In their report, they stated, "The recent military actions in Israel are unlikely to be perceived by the market as a catalyst for destabilizing oil supply."

Specifically, Citigroup adjusted its three-month Brent oil price outlook from $74 per barrel down to $70 per barrel, and its six to twelve-month view lowered from $72 to $60 per barrelDespite these reductions, risks to price stability linger, with Citigroup estimating a 10% chance of a significant price surge, which is down from a previous forecast of 20%.

Liu Shunchang believes that after such a stark short-term decline, the oil market's focus will shift toward fundamental supply and demand dynamicsThe expectation is that Brent crude will fluctuate within a range of $70 to $74 per barrel

A series of forthcoming events, including U.Semployment data and Federal Reserve decisions, may further increase volatility in the oil market and potentially disrupt this steady trend.

In the longer term, Liu observes that market sentiments regarding the oil fundamentals in 2025 are predominantly pessimistic, predicting an oversupply scenario as nations like OPEC+ increase production aligned with previous commitmentsConcurrently, non-OPEC nations, particularly the U.Sand Canada, continue increasing their output, while China's oil demand faces challenges against a backdrop of the country's economic growth and the emergence of alternative energy sources.

Tian Meng anticipates that oil prices may continue to face downward pressures, with the possibility of breaching month-low points attained in September

This projection is underpinned by two key considerations: firstly, the inherent softness in oil supply-demand fundamentals with no immediate cuts from OPEC+, and secondly, the significant price gap left by the October 28 price movements which could trigger a short-selling momentum with support hovering around $65 per barrel.

"There is still potential for oil prices to retreat," Guo Yanpeng concluded, emphasizing three main contributors to this outlook: firstly, continued production increases from OPEC+ set to kick in starting December; secondly, seasonal trends as crude demand enters a traditionally softer phase with rising inventories; thirdly, a noticeable dip in Chinese crude imports as the nation rapidly transitions towards renewable energy sources.

He forecasts that 2024 could represent a pivotal point for oil market dynamics