China's economic issues are so serious that even the oil market doesn't care about Middle East tensions — for now

• Israel launched a ground offensive against Hezbollah targets in southern Lebanon on Tuesday.
• Despite the Middle East's significant oil production, crude prices were little changed.
• China's slowing crude demand growth and economic struggles are dampening oil market sentiment.

Israel launched a ground offensive against Hezbollah targets in southern Lebanon on Tuesday in a marked escalation of tensions in the Middle East — and the energy markets largely shrugged.

The indifference is significant because the Middle East is a huge producer of crude oil — pumping one-third of the world's supply — so any geopolitical tension in the region could spark some sort of meaningful price gain.

This time, oil prices simply nudged up a little.

Global benchmark Brent crude oil futures were up 0.17% to $71.82 per barrel at 2.14 a.m. ET. Benchmark US West Texas Intermediate futures were 0.19% higher, at $68.32 per barrel.

Notably, the gains followed a 17% decline in Brent and a 16% drop in US WTI futures over the third quarter of the year, when traders were on edge for upside price action amid the developments in the Middle East.

The reason isn't rocket science. It's mostly China — the world's largest importer of crude oil.

"The main cause for the bearish sentiment has been a steady slowing of crude demand growth, especially in China," wrote Henning Gloystein, the practice head of energy, climate, and resources at the Eurasia Group, last month.

The world's second-largest economy has been struggling to stage a convincing recovery post-pandemic and is battling multiple challenges, including a property crisis, high youth unemployment, and deflation.

Beijing pulled out an economic stimulus package last week that massively boosted sentiment in China's previously downbeat stock markets, but most analysts are saying the measures are just not enough to turn the situation around on the ground.

Even Chinese leader Xi Jinping acknowledged the extent of China's problems in the country's National Day speech on Monday, saying the path forward wouldn't be smooth.

BMI, a research firm, wrote last week that short positions in Brent outnumbered longs for the first time earlier in September.

"Sentiment in the market is already weak, with a bearish macro narrative weighing heavily to the downside, and investors are currently far more responsive to bearish price drivers than to bullish ones," wrote BMI's analysts.

The sentiment over China has been so poor that Saudi Arabia has pretty much thrown in the towel on pushing oil higher.

The kingdom — which is the world's largest crude exporter and OPEC's de facto leader — is giving up its $100 per barrel price target and ready to increase oil output, the Financial Times reported last week.

This means that Saudi Arabia is looking to corner a larger market share instead of targeting higher profit margins by restricting output.

This would be a big shift in policy, since Saudi Arabia has been leading OPEC and the group's allies, including Russia, in maintaining oil supply cuts since late 2022.

Despite the downside pressure on oil prices, things could change quickly if geopolitical uncertainty rises further in the Middle East.

The US may also provide some support to the market as crude oil inventories hit a two-and-a-half year low as of September 20, the latest data available.

"Yes, it is true that traders are worried about the fact that Chinese demand for oil is not back yet to a level that can make the OPEC stop extending the supply cut process," wrote Naeem Aslam, the CIO at London-based Zaye Capital Markets.

"However, the fact that the US oil stockpiles are clearing more quickly indicates that the demand for oil in the world's largest economy is trending in the right direction, which is positive for price action," Aslam added.