Middle East concerns fuel supply fears, resulting in a rise in oil prices
Published on: January 31, 2024.
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Oil Prices Rebound on Geopolitical Tensions in the Middle East
Singapore – Oil prices have bounced back in early trade on Tuesday after a more than 1% drop in the previous session. The escalation of geopolitical tensions in the Middle East, a major oil-producing region, has fueled concerns about supply. Brent crude futures rose by 17 cents, or 0.21%, to $82.57 a barrel, while U.S. West Texas Intermediate crude was up by 17 cents, or 0.22%, at $76.95 a barrel.
The drop in oil prices on Monday was driven by worries about demand from China, the largest crude consumer in the world, following a Hong Kong court order to liquidate China Evergrande Group, a property giant, amidst a deepening real estate crisis. However, the rebound in prices today indicates that the market is starting to factor in geopolitical risks again, particularly in the Middle East.
The energy sector team lead at DBS Bank, Suvro Sarkar, has stated that oil prices trading above $80/bbl are incorporating a geopolitical risk premium due to ongoing issues in the Middle East. The situation could resolve itself within the next week or two if there is no strong reaction from the United States. However, if the situation worsens into a standoff between the U.S. and Iran with stricter sanctions, oil prices could sustain at a range of $80-100/bbl for some time.
The recent lethal drone attack in Jordan by Iran-backed militants, which resulted in the first U.S. military deaths since the Israel-Gaza war began, has put markets on edge. The United States has vowed to take all necessary action to defend its troops. Analyst Vivek Dhar from Commonwealth Bank of Australia has emphasized the vulnerability of Iran’s oil exports to potential enforcement of greater sanctions. Iran exported 1.2-1.6 million barrels per day of crude oil throughout most of 2023, representing 1-1.5% of global oil supply.
The concern lies in Iran’s response to rising tensions with the U.S. If Iran threatens a blockade of the Strait of Hormuz, through which 15-20% of global oil supply transits, oil markets could be severely impacted. The situation remains uncertain, and the actions taken by Iran will dictate the course for oil prices.
Apart from geopolitical tensions, the market is also awaiting the Federal Reserve’s rate decision as the Federal Open Market Committee begins its two-day meeting on Tuesday. While interest rates are expected to remain steady, some investors speculate that the U.S. central bank may drop its hiking bias. Lower interest rates are generally positive for oil prices as they can boost demand.
Looking ahead, data from the American Petroleum Institute industry group and the U.S. Energy Information Administration will shed light on the inventory levels of crude oil, distillates, and gasoline stocks in the United States.
Source: Zawya
