What to Expect Next as Oil Drops to $88.4 a Barrel

Oil prices fell on Wednesday after weak economic data in Europe and possible de-escalation in the Israel-Hamas war weighed on demand.

The recent surge in oil prices has been arrested lately. Slow economic data in Europe and hope that the conflict in Gaza doesn’t devolve into a regional conflict pushed oil prices lower to around $88.4 a barrel. Interestingly, US inventories saw an abrupt drawdown, which could potentially lead to a resurgence in demand.

Oil Prices Slide Amid Prospects of De-Escalation in the Middle East

Earlier this month, oil prices climbed to more than $92 per barrel following a clash between Hamas and Israeli forces that took thousands of lives. At the time, the conflict led to risks of a broader proxy war, resulting in fears among investors over potential oil disruptions, sending crude prices higher.

However, the prices of oil took a sharp downturn over the past few days. The latest dip, which came on Wednesday, pushed prices into the red after a potential de-escalation in the Middle East conflict thwarted the odds of possible oil supply constraints in the region.

The US administration led by President Joe Biden urged Israel to delay its planned ground invasion of Gaza, citing “progress on the hostage front,” and the need for aid trucks to reach the Palestinian exclave.

However, a senior Israeli official denied the reports of the US seeking a delay. “We deny this report. We have a close dialogue and consultations with the US administration. The US is not pressing Israel in regards to the ground operation,” he said. When asked about the matter, Biden responded: “I’m talking to the Israelis.”

The Brent crude was trading at $88.43 on Wednesday, while the West Texas Intermediate (WTI) stood at $84.03.

Slow Economic Data in Europe Amplifies Pressure on Oil, Offsets Effects of US Inventory Draws

Another factor that put pressure on the oil markets is the latest batch of weak economic data, particularly in Europe. Notably, slow economic indicators across Germany, the eurozone, and Britain weighed on the outlook for energy demand, pushing crude prices lower for a third consecutive session.

The most recent readings suggested that Germany’s economy is already in recession. Meanwhile, Britain’s business sector posted another monthly activity decline, raising recession risks ahead of the Bank of England’s monetary policy meeting next week. Euro zone’s business activity data also took a surprise downturn this month, suggesting the bloc may be facing a recession.

In the meantime, a potential oil demand catalyst emerged on the other side of the ocean. New data from the American Petroleum Institute (API) demonstrated that US inventories slumped more than 2 million barrels (mb) in the week to October 20, exceeding expectations for a build of 1.6 mb.

In typical circumstances, this would drive oil prices higher. However, weak economic data in Europe and possible de-escalation of tensions in the Middle East seem to have offset the effects.

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