Oil Prices React to Middle East Concerns, Prompting Supply Fears

Oil prices experienced a rebound in early trading on Tuesday, recovering from a more than 1% decline in the previous session. Escalating geopolitical tensions in the Middle East, a major oil-producing region, fueled concerns about supply, contributing to the market’s volatility.

As of 0401 GMT, Brent crude futures showed a 0.21% increase, rising by 17 cents to reach $82.57 per barrel. Simultaneously, U.S. West Texas Intermediate crude witnessed a 0.22% gain, with a 17-cent increase, bringing it to $76.95 per barrel.

The dip in oil prices on the previous day was attributed to concerns surrounding a deepening real estate crisis, particularly in China, the world’s largest consumer of crude oil. These worries arose following a Hong Kong court’s decision to order the liquidation of the prominent property company, China Evergrande Group.

Suvro Sarkar, the lead of DBS Bank’s energy sector team, commented on the current situation, stating, “Oil price trading above US$80/bbl is pricing in some geopolitical risk premium again as flare-ups continue in the Middle East region. This could fade out within a week or two if there is no strong reaction from the US.”

Sarkar added, “If it does worsen into a US-Iran standoff and stricter sanctions, then we are looking at US$80-100/bbl range for oil to sustain for some time.”

Geopolitical concerns intensified after a deadly drone attack in Jordan by Iran-backed militants, resulting in the first U.S. military deaths since the Israel-Gaza war commenced. In response, Washington pledged to take “all necessary actions” to defend its troops, introducing an element of uncertainty into the markets.

Vivek Dhar, an analyst at the Commonwealth Bank of Australia, highlighted potential risks, stating, “If U.S.-Iran tensions escalate, particularly through a direct confrontation, the risk rises that Iran’s oil supply is adversely impacted.”

Dhar noted that Iran’s oil exports, representing 1-1.5% of global oil supply, could face vulnerabilities under heightened tensions. He emphasized the potential impact on oil markets if Iran were to threaten a blockade of the Strait of Hormuz, a critical transit route for 15-20% of global oil supply.

The oil price fluctuations also coincide with the upcoming Federal Reserve rate decision, as the Federal Open Market Committee (FOMC) begins a two-day meeting on Tuesday. While interest rates are expected to remain steady, there is speculation that the central bank may alter its hiking bias, which could influence oil prices positively by lowering interest rates and boosting demand.

Investors are currently estimating a 47% chance of a Fed rate cut in March, according to the CME FedWatch tool, marking a decline from 88% a month earlier.

Expectations for changes in U.S. crude oil and distillates inventories, along with gasoline stocks, add further anticipation to market dynamics. The American Petroleum Institute (API) will release stockpile data on Tuesday, while the Energy Information Administration (EIA) is scheduled to provide its statistics on Wednesday.

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