Price Surge Explained
On Wednesday, oil prices marked their fifth consecutive day of increase, reflecting investor anxieties surrounding potential supply disruptions in Iran.
This surge was primarily fueled by the looming possibility of a US attack on Iran, heightening the risk of retaliation targeting US interests in the region. These developments have significantly impacted the oil market. Brent futures saw an increase of 92 cents, or 1.4 per cent, reaching $66.39 a barrel at 1147 GMT. Concurrently, US West Texas Intermediate crude rose by 87 cents, or 1.4 per cent, to $62.02 a barrel. These price movements highlighted the sensitivity of the oil market to geopolitical events and supply-side risks.
Iran's Geopolitical Impact
The geopolitical instability, particularly in the context of Iran, played a crucial role in shaping oil price dynamics. US President Donald Trump urged Iranians to keep protesting, which further complicated the situation. Jorge Montepeque, managing director at Onyx Capital Group, highlighted the potential for regime change in Iran and the increased likelihood of a US attack as significant factors contributing to the price increase. The risk of supply disruptions due to these factors has caused concern in the market. Tehran issued a warning to US allies in the Middle East, indicating potential strikes on US bases if Washington initiated an attack on Iran, adding to the uncertainty and risk premium associated with oil prices.
US Inventory Concerns
While geopolitical events exerted upward pressure on oil prices, certain market factors attempted to curb the rise. The American Petroleum Institute reported a significant build-up in crude and product inventories in the United States, which contributed to containing the price surge. Gasoline inventories climbed by 8.23 million barrels, while distillate inventories increased by 4.34 million barrels from the previous week. Later on Wednesday, the US Energy Information Administration was scheduled to release its stockpile data. Additionally, a Reuters poll had indicated that US crude oil stockpiles were expected to have fallen the previous week. This contrast between rising and falling inventory levels further complicated the market's response.
Analyst Outlook and Insights
Analysts at Citi have raised their outlook for Brent crude over the next three months to $70 a barrel, primarily due to the risk of supply disruptions. These disruptions are viewed as resulting from the protests occurring in Iran, alongside rising geopolitical risks. The analysts noted, however, that the protests hadn't spread to the main oil-producing areas within Iran. This limited the impact on the actual supply available to the market. Although geopolitical tensions were the primary driver of oil prices, analysts' outlooks and interpretations provide additional context for the changes and the future of the market.
Venezuela's Production Impact
Adding another layer of complexity, Venezuela, an OPEC member, began reversing production cuts that were imposed under a US embargo. Crude exports from the nation were also resuming, which could have a stabilizing effect on the overall global supply. According to sources, two supertankers departed from Venezuelan waters on Monday with approximately 1.8 million barrels each of crude oil. These shipments could be part of an agreement between Caracas and Washington to allow exports, following the US capture of Venezuelan President Nicolas Maduro. These developments highlight the interplay of geopolitical factors, production decisions, and the influence of the US on global oil supplies.
