DTN Oil

WASHINGTON (DTN) -- Nearest delivery oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled the Thursday session lower as investors assessed a weaker-than-expected demand forecast from the International Energy Agency and deflation of geopolitical risk in the Middle East after Israel and the United Arab Emirates established formal diplomatic relations.

Oil prices were drifting lower Thursday afternoon when Israel and UAE announced a full normalization of diplomatic relations, potentially de-escalating tensions in a volatile region for crude supplies. This marked the first peace treaty between Israel and an Arab country in more than 25 years.

The landmark agreement will include establishing embassies, direct flights between Tel Aviv and Abu Dhabi, cooperation on energy and trade. Israel, on its part, agreed to suspend planned extension of sovereignty over a portion of the West Bank.

The oil complex came under pressure earlier in the session after IEA lowered its forecast for global oil demand growth for both 2020 and 2021, citing weakness in jet fuel consumption and stalled mobility across several major economies. The downgrade was partly attributed to new surges of coronavirus cases in the United States, India and other demand centers, reigniting concerns over depressed growth for longer than previously thought.

The Paris-based agency shaved 140,000 barrels per day (bpd) from its 2020 demand forecast for annualized growth of 91.9 million bpd and lowered 2021 estimates by 240,000 bpd to 97.1 million bpd. Jet fuel remains particularly vulnerable to pandemic resurgence, with the number of aviation miles traveled last month down 67% from last year, according to IEA data.

"With few signs that the picture will improve significantly soon, we have downgraded our estimate for global jet fuel and kerosene demand. In 2020, demand will be 4.8 million bpd or 39% below the 2019 level, and in 2021 the year-on-year recovery will be just below 1 million bpd," said IEA.

Meanwhile, supply is slowly returning to the market after Saudi Arabia, Kuwait and the United Arab Emirates phased out voluntary cuts of 1 million bpd in July and production in the U.S. has started to recover. The Organization of the Petroleum Exporting Countries in coalition with 10 producers led by Russia agreed to raise production further by 2 million bpd through December as they expect partial recovery in global demand. OPEC+ is not expected to adjust the current cuts of 7.7 million bpd when producers meet next week.

At settlement, West Texas Intermediate crude oil for September delivery declined 43 cents to $42.24 barrel (bbl) and the spot month international Brent crude contract slipped below $45 bbl. NYMEX ULSD September futures fell nearly 2 cents to $1.2381 gallon and front-month RBOB futures ended the session down about 1 cent at $1.2348 gallon.

Liubov Georges can be reached at liubov.georges@dtn

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