Onome Amuge
Oil prices rose more than $1 a barrel on Wednesday as investors reacted to escalating geopolitical risks in Europe and the Middle East, though swelling U.S. crude inventories tempered the rally and underscored a bearish supply outlook.
Brent crude, the international benchmark, settled up $1.10, or 1.7 per cent, at $67.49 a barrel, while West Texas Intermediate, the U.S. marker, gained $1.04, or 1.7 per cent, to close at $63.67. Both benchmarks had briefly spiked nearly 2 per cent in intraday trading before retracing gains on signs of weakening demand.
The moves came as markets digested a series of flashpoints that rattled traders this week. Poland confirmed it had shot down drones over its airspace during a large-scale Russian assault on western Ukraine, the first time a NATO member has taken direct defensive action in the conflict. A day earlier, Israel said it had carried out an attack targeting Hamas leadership in Doha, further stoking Middle Eastern tensions.
While neither development has yet threatened oil flows, analysts said risk premiums were creeping back into crude markets. “Geopolitical risk premiums in oil rarely last long unless actual supply disruption kicks in,” analysts at SEB noted, adding that Brent remains $2 below levels seen a week ago.
The geopolitical backdrop was further complicated by Washington’s push to tighten pressure on Moscow. President Donald Trump called on the European Union to impose 100 per cent tariffs on India and China, two of Russia’s largest crude buyers,in an attempt to curtail Moscow’s war financing. EU officials in Washington signalled openness to tougher sanctions but ruled out tariffs on Beijing and New Delhi, instead pointing to a potential accelerated phase-out of Russian fossil fuels.
The upward momentum in crude was checked by U.S. government data showing a sharp increase in oil and fuel stocks. The Energy Information Administration reported crude inventories rose by 3.9mn barrels last week, defying analyst forecasts of a 1 million barrel draw.
Inventories climbed by 1.5 million barrels, versus expectations for a 200,000-barrel decline, while distillates ,which include diesel and heating oil, swelled by 4.7million barrels, far above consensus estimates of 35,000 barrels.
“A very bearish report. The big headline is that crude build, and then on top of that we had a big drop in demand. Now we’re waiting to see how much gasoline consumption falls off after the U.S. summer driving season, and it looks like it will be substantial,” said John Kilduff, partner at Again Capital.
Kilduff warned that weak fuel demand, combined with softer U.S. export flows, may be signalling a slowdown in the world’s largest economy. “Given recent economic data showing weakness, especially in the labour market, this pattern could be another indicator of a broader slowdown both in the U.S. and globally,” he added.
The oil market’s mixed signals come as traders position for central bank moves and supply shifts in the months ahead. The Federal Reserve is expected to cut U.S. interest rates at its September 16-17 meeting, a step that could stimulate activity and bolster oil demand.
At the same time, the U.S. Energy Department has forecast strong global economic growth in coming years, which it said would underpin structural oil demand. Energy secretary Chris Wright cautioned, however, that U.S. production growth may plateau in the near term, potentially limiting America’s role as a swing supplier.
Still, the Organization of the Petroleum Exporting Countries and its allies, including Russia, are set to add output, according to the EIA, which has warned global prices will remain under downward pressure as OPEC+ brings fresh barrels to market.
Despite the near-term headwinds, investors continue to monitor how geopolitical risks could shift the balance. Analysts say NATO’s direct involvement in downing drones, even in a defensive capacity, represents a new and potentially volatile stage of the Russia-Ukraine war. Similarly, Israel’s strike in Doha highlights the risk of oil market disruption if Middle Eastern tensions escalate.
“The dark cloud of surplus ahead is still hanging over the market, but geopolitical shocks can quickly alter sentiment — particularly if they begin to touch key producers or transit routes,” SEB analysts said.
However, market fundamentals appear to outweigh the risk premium. With Brent trading below last week’s levels and U.S. stocks swelling, traders said the sustainability of Wednesday’s gains would depend on evidence of stronger demand or tighter supply in the weeks ahead.
