Geopolitics ignite oil prices once again

Business Recorder

5 hours ago

Crude oil prices remain volatile, navigating between tightening supply concerns and weakening demand signals. Brent crude has approached $65 per barrel, driven primarily by geopolitical risks rather than underlying supply-demand fundamentals.
The Russia-Ukraine conflict has sharply escalated, heightening the risk premium attached to oil markets. Increasing drone strikes by Ukraine and Russian retaliatory actions have raised concerns over potential disruptions to energy infrastructure, particularly Russian oil exports. This direct threat to oil logistics significantly threatens global oil supplies.
Further compounding supply-side concerns is Iran's anticipated rejection of the recent U.S. nuclear deal proposal. Diplomatic sources indicate Tehran's negative response to halting uranium enrichment, cementing its continued exclusion from international oil markets. With ongoing U.S. sanctions, Iran's crude exports remain limited to China.
Additionally, the escalating conflict between Israel and Iran has added another layer of complexity. Recent Israeli airstrikes on Iranian oil infrastructure and Iran's missile responses have spiked oil prices, briefly pushing Brent crude to near $75 per barrel. This geopolitical risk factor has particularly highlighted vulnerabilities around the strategic Strait of Hormuz, through which approximately 18-20 million barrels per day transit. Iran has threatened closures, potentially pushing oil prices significantly higher if disruptions occur, with analysts suggesting spikes above $100 per barrel in the event of a major escalation.
Simultaneously, wildfires in Alberta, Canada, have reduced oil sands production by approximately 350,000 barrels per day, equating to about 7 percent of the province's total output. While minor in global terms, these outages amplify market sensitivities amid other supply disruptions.
Additionally, the recent OPEC+ meeting reinforced bullish sentiments by approving a modest production increase of only 411,000 barrels per day for July—far below expectations of a larger supply boost. This decision triggered investors to unwind bearish positions, contributing to the immediate rally.
However, despite these supply-side factors, demand indicators present a starkly different narrative. China's oil consumption, a critical component of global demand, has shown notable weakness. Chinese crude imports reached a six-month low in April amid reduced industrial activity and refinery downtime. Coupled with ineffective economic stimulus impacts, this underscores persistent sluggishness in Chinese demand.
Going forward, oil price trajectories appear increasingly contingent upon geopolitical developments rather than fundamentals. Continued volatility driven by Israel-Iran tensions could keep prices elevated in the $70-80 per barrel range, with severe escalations potentially driving prices significantly higher. Beneath these geopolitical headlines, global demand fragility, especially in major economies like China, poses a substantial downside risk. Without sustained economic recovery, long-term demand forecasts may require downward adjustments.
In sum, the crude oil market remains delicately balanced, driven by geopolitical tensions temporarily overshadowing fundamental demand weaknesses. Market participants must closely monitor geopolitical developments, particularly involving Israel, Iran, Russia, and Ukraine, alongside macroeconomic indicators to gauge future price movements effectively.
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