Oil Skyrockets as Middle East Conflict and U.S. Demand Hit Critical Levels

Oil Prices Surge Amid Geopolitical Tensions and Supply Concerns

Rising U.S. Oil Demand and Production Data

In July 2024, the U.S. witnessed a significant jump in oil consumption, reaching 20.48 million barrels per day (bpd), the highest seasonal level since 2019. This 1.2% rise from June reflects heightened demand for gasoline and jet fuel. Notably, jet fuel demand hit 1.83 million bpd, marking a significant recovery since the pandemic. On the supply side, U.S. oil production slightly dropped by 25,000 bpd to 13.205 million bpd. Despite this, New Mexico saw a production increase of 25,000 bpd, balancing losses from Texas and North Dakota.

Global Geopolitical Risks Affecting Oil Supply

The escalation of conflict in the Middle East, particularly involving Israel, Hamas, and Hezbollah, continues to exert upward pressure on oil prices. A full-scale conflict between Israel and Iran's proxies in Lebanon could severely disrupt global oil flows. Analysts recall the impact of the 1973 oil embargo, which saw prices jump over 267%. Any action resembling the embargo from Islamic OPEC members could trigger similar supply shocks, particularly if Iran pushes for an oil embargo on Israel’s allies.

Supply and Demand Dynamics Under Pressure

As oil demand rises in the U.S., there is growing uncertainty about the balance of production and inventory levels. The recent drawdown in U.S. crude stockpiles—4.5 million barrels for the week ending September 20—adds to this concern. This comes as OPEC members have already reduced production to support prices, leading to a tighter global oil market. At the same time, rising inflation and geopolitical uncertainty could restrict further expansion of production capacity, making supply vulnerable to any disruptions.

OPEC's Role and Future Oil Supply

OPEC's production cuts, which have been implemented to stabilize prices, may now face additional pressure from geopolitical risks. Analysts predict that any large-scale disruptions, such as those caused by attacks on Saudi oil infrastructure, could see oil prices skyrocket by 35-75%, depending on the severity of the crisis. The situation in the Middle East remains a key variable that could dictate the direction of oil markets in the coming months.

AI’s Growing Energy Demand

While global attention focuses on geopolitical risks, the rise of artificial intelligence is placing an additional burden on energy markets. As AI-driven data centers proliferate, they are consuming an increasing share of the world’s electricity. This surge in demand is straining utilities and complicating efforts to transition to renewable energy sources. Microsoft’s deal to reopen the Three Mile Island nuclear power plant underscores the growing reliance on traditional energy sources to meet AI-related electricity needs. This dynamic could have long-term implications for both energy policy and the oil market.

Dividends and Share Buybacks in the Oil Sector

Despite mounting pressure to transition to green energy, oil and gas (O&G) companies continue to prioritize shareholder returns. Record profits in recent years, driven by high oil prices, have led to increased dividend payouts and share buybacks. For instance, ExxonMobil and Chevron returned $104 billion to shareholders in 2022, signaling confidence in their ability to sustain cash flows even amid the energy transition. However, critics argue that this focus on short-term returns undermines efforts to invest in renewables.

Oil Prices and Future Outlook

The combination of rising U.S. demand, tightening supply, and geopolitical tensions suggests that oil prices will remain elevated in the short to medium term. The Energy Information Administration's (EIA) latest data reflects this trend, with growing consumption of both crude oil and natural gas. Meanwhile, the potential for escalations in the Middle East and the increasing strain on electricity grids from AI demand could further drive volatility in oil markets.

Verdict: With sustained demand growth, geopolitical risks, and a constrained supply outlook, the oil market is expected to remain bullish. Investors should monitor global developments closely as any further disruptions could push oil prices to new highs.