The oil market experienced heightened volatility in October triggered by the increasing geopolitical risks in the Middle East over the past month. The increased volatility was driven by concerns related to potential supply disruptions, rather than actual changes in supply. So far, the Israel – Hamas conflict has not impacted oil supply from the region, as Israel is a minor oil producer with minimal influence on the market.

All in all, not much risk premium has been seen so far. Nonetheless, a significant risk for the market arises if the situation escalates and leads to supply disruptions from key regional producers, with Iran presenting the most obvious one.

Although U.S. sanctions against Iran are still in place, their enforcement has been relatively relaxed this year. As a result, Iranian oil supply has increased from approximately 2.5 million barrels per day at the beginning of the year to over 3 million barrels per day currently.

Throughout October WTI crude oil lost 15% as a lack of escalation in the Middle East removed worries about disruptions to supply in the oil-rich region, while demand outlook from the world’s top crude importer China remained uncertain.

Crude has mostly given up its war premium as the Middle East conflict hasn’t endangered supplies from the region, which is a source of about a third of the world’s oil. That has brought the attention back to demand concerns. Factory activity in China moved back into contraction last month, according to data released this week, while U.S. fuel demand remains low and crude stockpiles are rising. There are also signs of weakening diesel demand in some European countries such as Spain, the UK, Italy, and France.

Source: TradingView

Oil prices staged a small rebound on Thursday on the back of improved risk environment, as markets are building up hopes that the Fed is likely done with its rate hikes. Nonetheless, there are still some reservations around oil demand outlook this week as China’s PMI did not provide much conviction of a revival of the demand.

China’s manufacturing activity unexpectedly contracted in October. The official purchasing managers’ index (PMI) fell to 49.5 in October from 50.2, dropping back below the 50-point level which separates contraction from expansion. On the supply side, top oil exporter Saudi Arabia is expected to reconfirm an extension of its voluntary oil-output cut of 1 million barrels per day through December.

While at this stage there is no sign the latest pull back is reversing course, the weakening U.S. dollar along with the broader improvement in risk sentiment over the past few days is likely to help oil prices stabilise.