Rising geopolitical tensions are pushing oil prices higher
Oil prices rose on Monday after Saudi Arabia and Russia, the top oil exporters, said they would commit to additional voluntary oil production cuts until the end of the year, keeping supplies limited, while investors await tougher U.S. sanctions on Iranian oil..
Brent crude futures rose 41 cents, or 0.5 percent, to $85.30 a barrel, while U.S. West Texas Intermediate crude was at $81.05 a barrel, up 54 cents, or 0.7 percent..
An Energy Ministry source said in a statement that in line with analysts’ expectations, Saudi Arabia confirmed that it will continue its additional voluntary reduction of one million barrels per day, which means production of about 9 million barrels per day for the month of December. .
Following the Saudi statement, Moscow also announced that it would continue to cut additional voluntary supplies by 300,000 barrels per day of its exports of crude oil and petroleum products until the end of December..
Both contracts posted their second straight weekly decline as last week ended down about 6 percent, driven by a decline in geopolitical risks that arose from fears of supply disruptions due to a potential widening conflict in the Middle East. The OPEC+ goal of stabilizing prices is likely to remain in an acceptable range, which could lead to further tightening of fundamentals in 2025.
A further 120 million barrels in global inventories is expected in the fourth quarter, as well as a 172 million barrel decline from the third quarter. Finally, Vortexa’s weekly data on the volume of crude oil in global floating inventories rose +5.8% by weight to 74.69 million barrels as of October 27, a sign of weakening demand.
The Chinese economy and its impact on global oil markets
More recently, fears of a spillover of the conflict between the Middle East, which could implicate Iran and its allies in the region, have provided significant support to oil prices. Unfortunately for bulls, the momentum in oil prices has faded with the war risk premium that helped fuel higher oil prices in the early days.
But that’s just part of the picture, with no shortage of bearish catalysts in oil markets. China’s economy continues to send mixed signals with recent reports of a debt crisis that overshadowed previous reports of strong demand for commodities including oil, copper and iron ore..
China is the world’s largest oil importer. Second, the Biden administration has temporarily eased sanctions on Venezuela’s oil exports to help the country in efforts to hold fair presidential elections next year, a move analysts estimate could add up to 200,000 barrels per day to oil markets..
Third, U.S. crude oil production rose to an all-time high of 13.2 million barrels per day, weakening a large part of OPEC+ cuts.
All these factors have weighed heavily on oil prices, with WTI falling from this year’s high of $93.68 per barrel on September 27 to $80.24 currently, while Brent crude fell from $92.20 per barrel to $84.76 on the timeframe..
Fortunately for the bulls, one of the main positive catalysts could provide the necessary impetus to pull oil prices out of the stall: the less hawkish Federal Reserve. On Wednesday, Federal Reserve Chairman Jerome Powell announced the decision to leave the interest rate, and the federal funds rate, unchanged at the range of 5.25-5.5%, a move that could benefit oil and commodity prices.
Oil prices weighed by U.S. bill and China’s economic data
Market focus shifted to demand expectations that remain uncertain and investors this week are looking for more economic data from China after the world’s second-largest oil consumer released disappointing factory data for October last week..
Oil prices are expected to be affected by headlines from the Middle East and technical charts this week. He added that WTI needs to stay above the support level at $80 per barrel early this week, otherwise prices could fall to the low of $77.59 hit in August..
The U.S. House of Representatives on Friday approved a bill to strengthen sanctions on Iranian oil that would impose measures on foreign ports and refineries that process oil exported from Iran if it is signed into law..
In the United States, the number of oil rigs fell by 8 to 496 last week, its lowest level since January 2022, energy services company Baker Hughes said in its weekly report on Friday..
Crude oil markets are now directly focused on key economic readings from China, due later in the week. China’s trade data is due on Tuesday and is expected to provide further signals on the country’s commodity demand..
While China’s oil imports and fuel demand have remained strong this year, the country has steadily increased its inventories, which could lead to lower imports in the coming months. Traders also fear lower fuel demand, especially if economic conditions worsen.
The impact of interest rate and dollar changes on oil markets
It is known that changes in the federal funds interest rate directly affect the US dollar. When the Federal Reserve increases the federal funds rate, interest rates usually rise throughout the economy. Higher yields, in turn, attract venture capital from investors, including foreign investors, who are looking for higher yields on bonds and interest rate products. Global investors sell their investments denominated in their local currencies in exchange for investments denominated in US dollars, leading to a stronger dollar. The opposite happens when the Fed cuts Interest rates leading to a weaker dollar.
Oil and many other commodities tend to have an inverse relationship with the dollar, as they move against each other. Although the Fed has not cut interest rates, its less hawkish stance is already having a negative impact on the dollar, with the US dollar index, a measure that places the greenback against a basket of six major currencies, down 3.6% since Wednesday. Oil prices have yet to respond to the dollar’s weakness, but are likely to do so if the trend continues..
If the dollar continues to lose some of its strength, investors will no doubt begin to speculate on how high oil prices will be. Standard Chartered brings us back earlier this week, which noted that the price of oil at $98 is well supported by supply and demand fundamentals, with global demand expected to grow by 1.5 million barrels per day in 2024, as non-OPEC demand declines. Adding 0.88 million barrels per day led by the United States, Canada, Guyana and Brazil. Standard Chartered also predicted that supply deficits in the first and second quarters would eventually give way to a moderate surplus in the second half..