Oil Prices Rise over Lingering Supply Risks

Global prices of crude oil rose on Tuesday as the ongoing conflict between Israel and Palestine is projected to escalate further while the market weighs lingering supply risks coming from Iran oil flows. 

International benchmark crude Brent traded at $86.61 per barrel, translating to a 0.30% rise from the closing price of $86.35 a barrel in the previous trading session on Monday.

The American benchmark West Texas Intermediate (WTI) traded at the same time at $82.58 per barrel, up 0.32% from Monday’s close of $82.31 per barrel.

The ongoing conflict between the two nations heightens concerns that the clashes might escalate into a regional turmoil that will disrupt oil supply routes, deepening the supply deficit predicted for the rest of the year.

Meanwhile, the fears of a possible disruption in Iranian oil flows, fueled by the US government’s accusation of Iran of being responsible for the attacks on US forces in Syria and Iraq, put upward pressure on oil prices.

However, rising demand worries ahead of the US Federal Reserve (Fed) meeting on Wednesday which is anticipated to keep the policy rate high for longer than expected, limited upward price pressures.

Concerns that China, the world’s largest oil importer, may see a downturn in oil consumption as a result of weaker-than-expected factory activity data also restrained additional price hikes.

The oil market started the week on a weak footing. However, geopolitical risks remain elevated and the short-term outlook remains dependent on developments in the Middle East Energy – supply risks remain.

The oil market came under significant pressure yesterday with ICE Brent settling 3.35% lower on the day, while WTI traded down to its lowest level since the Israel-Hamas conflict. This is despite the fact that there are clear upside risks still facing the market in the current geopolitical environment.

Disruptions to Iranian oil flows remain the most obvious risk to the market, which could see anywhere between 500k b/d and 1m b/d of supply lost if the US were to strictly enforce sanctions once again.

Up until now, developments in the Middle East have yet to impact the oil supply. In the absence of supply disruptions from the region, it is difficult to see a significant and sustained upside in prices.

Also important for the market are developments in Venezuela. Recently, the US decided to ease sanctions against Venezuela in return for the promise of fairer elections in 2024.

The expectation was that the lifting of these sanctions could see Venezuela increase its oil supply in the region of 200k b/d. However, overnight, the supreme court in Venezuela suspended the results of the opposition’s primary elections, which will likely call into question whether the sanctions relief provided to Venezuela will remain in place.

On the calendar for today, December Brent futures expire and the API will also release weekly US inventory data. In addition, markets will await China’s official PMI data which will be released this morning.

Expectations are for the manufacturing PMI to come in at 50.2 for October, unchanged from the previous month. A second consecutive reading in expansion territory will likely go down well with markets, showing some further signs of firming by the Chinese economy.

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