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Oil prices took a step back on Tuesday, following a sharp rally that saw them rise by more than 7% over the previous three sessions. The recent surge was driven by heightened concerns over potential supply disruptions in the Middle East and Libya, prompting traders to reassess the situation.
Market Performance
As of 0430 GMT, Brent crude futures fell by 18 cents, or 0.2%, settling at $81.25 a barrel. Similarly, U.S. West Texas Intermediate (WTI) crude futures dipped 28 cents, or 0.4%, to $77.14 a barrel. This slight decline comes after a period of significant gains, with WTI and Brent increasing by 7.6% and 7%, respectively, over the past three trading days.
A Pause in the Rally
The market’s recent performance suggests a temporary pause in the upward momentum. According to Yeap Jun Rong, a market strategist at IG, the losses in oil prices appear contained in Tuesday’s session, indicating that prices are “taking a breather” after the sharp rally in recent days. He noted that market participants are now adopting a “wait-and-see” approach as they monitor further developments in the region.
Key Drivers of the Recent Surge
The three-day rally in oil prices was fueled by a combination of geopolitical risks and concerns over potential supply disruptions:
- Middle East Tensions: Escalating military assaults between Israel and Hezbollah in Lebanon over the weekend raised fears of a broader conflict in the Middle East. The potential for such a conflict to disrupt oil supplies from this key producing region added a significant risk premium to prices.
- Libyan Production Uncertainty: In Libya, tensions over the leadership of the central bank led to the potential shutdown of key oilfields in the eastern part of the country. These oilfields are crucial as they account for almost all of Libya’s oil production and exports. The eastern-based administration announced that production and exports would be halted, though there has been no confirmation from the internationally recognized government in Tripoli or the National Oil Corp (NOC), which controls the country’s oil resources.
- U.S. Interest Rate Expectations: The expectation of U.S. interest rate cuts also played a role in driving oil prices higher. Comments from Federal Reserve Chair Jerome Powell suggested that rate cuts could be imminent, boosting optimism for increased fuel demand and contributing to the price surge.
Looking Ahead
As oil prices take a breather, the market remains on edge, with traders closely monitoring the situation in the Middle East and Libya. The potential for further geopolitical escalations or supply disruptions could lead to renewed volatility in the oil market. For now, the cautious stance adopted by market participants reflects the uncertainty that continues to cloud the outlook for global oil supplies.
