Oil Rally Faces Resistance as Demand Destruction Catches Up
Brent crude has surged to nearly $110 a barrel after a strong week, but oil bulls may soon face challenges in sustaining higher prices.
The rally is driven by supply fears, including constrained traffic through the Strait of Hormuz and Iran-aligned Houthis seizing Yemen's port of Mocha. OPEC output fell by about 640,000 barrels a day in August, reinforcing concerns about disrupted barrels being difficult to replace.
Naeem Aslam, chief investment officer at Zaye Capital Markets, warns that 'supply tightness supports prices, but demand destruction can cap the upside if crude remains elevated for too long.' He notes that US diesel prices have reached record highs above $6 a gallon, and refining constraints have lifted diesel margins.
The International Energy Agency expects global oil demand to decline by about 1.6 million barrels a day in 2026 due to elevated fuel costs and disrupted trade. China's rapid electrification of its transport system is also weakening support for previous oil rallies, as electric vehicles could displace about 1.2 million barrels a day of Chinese oil demand in 2026.
Dennis Kissler of BOK Financial believes that Brent crude may soon enter an 'overbought condition' and face a corrective phase due to its violent move this week. Prices can fall even while risks remain elevated, exposing the crowded trade.