Oil rises on supply concerns amid Middle East tensions

Business a.m

Crude oil prices jumped into positive territory after falling by more than 1 per cent in the previous session. Tuesday’s  upward momentum was driven by rising tensions in the Middle East, a major oil-producing region, which fueled concerns about supply. However, a bleak economic outlook for China, the world’s largest importer of crude oil, limited the potential gains.

The March contract for Brent crude, which expires on Wednesday, saw a modest gain of 8 cents, or 0.1 per cent, to $82.48 per barrel. The more actively traded April contract saw a larger gain of 13 cents, or 0.2 per cent, to $81.96 per barrel. The U.S. benchmark, West Texas Intermediate (WTI), also saw an increase, with the March contract rising 24 cents, or 0.3 per cent, to $77.02 per barrel.

The threat of further escalation of tensions between the U.S. and Iran has added to the uncertainty in global markets. Following a deadly drone attack in Jordan by Iran-backed militants, which killed two U.S. military personnel, the U.S. vowed to take all necessary actions to defend its troops. This has raised the risk of a direct confrontation between the two countries, which could have a major impact on global oil supplies.

According to Commonwealth Bank of Australia analyst Vivek Dhar, if U.S.-Iran tensions escalate further, especially if it leads to a direct confrontation between the two countries, the impact on Iranian oil supplies could be significant. 

“Iranian oil exports are likely the most vulnerable via potentially greater enforcement of sanctions,” he added.

Dhar’s estimates indicate that during 2023, Iran exported between 1.2 and 1.6 million barrels per day of crude oil. This amounts to between 1 and 1.5 per cent of the world’s overall oil supply.

However, analysts  noted that concerns about the Chinese economy and the potential ramifications of Evergrande’s liquidation order limited oil price gains. According to PVM analyst John Evans, the potential collapse of China’s property sector could negate any economic stimulus measures by the Chinese government, and have significant negative effects on the global economy.

Analysts will be watching the upcoming OPEC+ meeting on February 1 for any clues about the group’s production plans, even though no changes to the oil policy are expected at this time. The main focus of attention will be on how OPEC+ plans to respond to the current geopolitical tensions and how these might affect the global oil market in the future.