Oil Prices Navigate Geopolitical Tensions and Market Dynamics

In a nuanced dance between geopolitical tensions, demand considerations, and currency dynamics, oil prices exhibited mixed movements on Wednesday. The March contract for Brent crude managed a modest rise of four cents, reaching $79.59 per barrel, while US West Texas Intermediate crude mirrored the increase, ticking up four cents to $74.41 a barrel by 0712 GMT.

A significant influencer in the oil market’s ebb and flow has been the recent data from the American Petroleum Institute (API), released on Tuesday. According to the API, US crude inventories witnessed a substantial 6.67 million-barrel decline for the week ending January 19. However, an unexpected twist emerged as gasoline inventories experienced a notable increase of 7.2 million barrels. This uptick has raised concerns within the market about the demand for fuel, particularly in the context of the world’s largest oil consumer.

As traders awaited official data from the Energy Information Administration (EIA), released later on Wednesday, the focus was on confirming and interpreting the trends illuminated by the API. These reports are crucial for shaping market sentiment and projecting future demand and supply dynamics.

Currency dynamics played a significant role in molding oil prices, with the dollar index exhibiting strength near a six-week high. A robust dollar tends to make dollar-denominated commodities, including oil, more expensive for buyers using other currencies. This scenario has the potential to curtail demand and put downward pressure on oil prices.

Adding an additional layer of complexity to the market equation were geopolitical tensions, particularly in the Middle East. A coalition led by the US and Britain launched new strikes on Houthi fighters in Yemen, aiming to curtail Houthi attacks on global trade, especially in the Red Sea. The Red Sea is a key passage for about 12% of global oil trade, making the geopolitical developments there of utmost importance to oil markets.

Asked whether tensions in the Red Sea could push oil prices to rise for the third week, Hashad noted that the prices of US crude oil futures contracts started this week’s trading with uptrend on the rise in an attempt to maintain the recent gains for the third session in a row. Prices have begun to attack the psychological barrier of $73 per barrel and are now hovering around the $73.40 per barrel level.

Hashad also pointed out that the continuation of political and geopolitical tensions, in addition to the current unrest in the Red Sea, continues to dominate the main market scene, in general, and affects investors’ sentiment.

There is a state of fear about the scarcity of supply and the possibility that the movement of oil will witness a disruption in supplies in the near term, and therefore, prices are supported from time to time.

Hashad also explained that there is another factor pushing prices to further surge, which is the recent report issued by the International Energy Agency, which indicates the possibility of improving global demand for oil, in addition to the extremely cold weather in the United States of America, which led to the closure of some major drilling rigs and resulted in a supply disruption. Nearly 40% of production levels are in the USA.

Mohammed Hashad, Analyst and Head of Research and Development at NoorCapital answered in an interview on Dubai TV

Analysts, including Vikas Dwivedi, a global energy expert at Macquarie, acknowledged the tangible impact of geopolitical factors on oil prices. Dwivedi noted that without these tensions, oil prices might have experienced a more significant drop. However, he anticipated that over time, supply risks would decouple from conflict risks, drawing parallels with situations such as Russia and Ukraine.

Supply-side developments were also pivotal in shaping the oil market landscape. The Sharara oil field in Libya, which produces 300,000 barrels per day, resumed operations on January 21 after being halted due to protests earlier in January. Nevertheless, challenges persisted, with reports indicating that oil production in North Dakota, the third-largest oil-producing state in the US, remained below normal levels due to weather-related disruptions.

As traders grapple with these complex dynamics, the oil market remains within its current range. Observers and analysts continue to monitor developments, recognizing the delicate balance between geopolitical tensions, supply considerations, and global economic factors that collectively shape the trajectory of oil prices. As the market navigates through these intricacies, participants remain vigilant, adapting their strategies to the evolving landscape of the oil industry.