Jan 30, 2024: Oil prices bounced back in early trade on Tuesday, recovering from a more than 1% drop in the previous session, as escalating geopolitical tensions in the Middle East fueled concerns about oil supply. Brent crude futures rose 17 cents, or 0.21%, reaching $82.57 a barrel by 0401 GMT, while U.S. West Texas Intermediate crude was up 17 cents, or 0.22%, at $76.95 a barrel.
The rebound followed a decline on Monday triggered by concerns about demand from China, the world’s largest crude consumer, amid a deepening real estate crisis. A Hong Kong court’s order for the liquidation of China Evergrande Group added to worries in the market.
Suvro Sarkar, DBS Bank’s energy sector team lead, noted that oil prices above $80/bbl were reflecting a geopolitical risk premium, particularly due to ongoing tensions in the Middle East. The situation could change within a week or two if there is no strong reaction from the U.S. However, if the tensions escalate into a U.S.-Iran standoff with stricter sanctions, oil prices might sustain in the $80-$100/bbl range for an extended period.
Geopolitical concerns heightened as the U.S. vowed to take “all necessary actions” following a deadly drone attack in Jordan by Iran-backed militants. Commonwealth Bank of Australia analyst Vivek Dhar highlighted the potential impact on Iran’s oil supply if tensions escalate, emphasizing the vulnerability of Iranian oil exports, representing 1-1.5% of global oil supply.
Dhar also pointed out that Iran’s response to rising U.S. tensions, including the possibility of threatening a blockade of the Strait of Hormuz (transiting 15-20% of global oil supply), remains a key concern for oil markets.
The oil price rebound comes ahead of a Federal Reserve rate decision, with the Federal Open Market Committee (FOMC) starting a two-day meeting. While policymakers are expected to keep interest rates steady, the possibility of a change in the U.S. central bank’s hiking bias is being closely watched by investors, as lower interest rates are generally positive for oil prices and could stimulate further demand.