Oil climbs as traders digest geopolitical developments

Oil prices climbed by nearly a dollar per barrel on Monday, on concerns that Middle Eastern tensions and Russia’s escalating invasion of Ukraine could limit world supplies.

Brent crude prices closed at $78.22 per barrel, up 66 cents (0.9%), while US West Texas Intermediate crude futures settled at $72.78 per barrel, up 50 cents (0.7%). Both contracts were awarded for the first time in four sessions.

Traders have been constantly monitoring the situation in the Middle East, where progress on ceasefire discussions between Israel and Hamas appears to be elusive, implying that tensions in the oil-producing region will remain high.

The US also resumed its campaign against the Houthis in Yemen, whose attacks on ships have disrupted global oil trade lines.

Two Ukrainian drones bombed Russia’s largest oil refinery in the country’s south on Saturday, according to a source in Kyiv. This is the latest in a series of long-range strikes on Russian oil facilities, which has limited Russia’s exports of naphtha, a petrochemical feedstock.

These attacks on Russian energy supplies are beginning to take their toll. Monday’s gains came after oil prices fell 7% the previous week on fears about slowing economic activity in China and diminishing optimism for imminent interest rate reduction in the United States.

There is only so much this market can discount until you have to admit that we are not pricing in geopolitical risk correctly.

Limiting oil’s gains, data released on Monday indicated that US services sector growth improved in January, damping hopes for further rate cuts and boosting the US currency to its highest level in over three months against other major currencies.

Monday’s stronger US currency reduces demand for dollar-denominated oil among investors holding other currencies.

Rising oil supply are also keeping oil prices stable. A preliminary Reuters poll suggests that US crude stocks climbed last week.

Monday’s rally, which comes after last week’s price losses, differs from previous risk-driven price increases. Non-OPEC supply growth, particularly in light crude from the United States, is keeping oil markets in healthy conditions.