Oil prices slide amidst dollar surge and Middle East tensions

Geopolitical risks offset greenback gains, keeping oil market on edge
Oil prices slide amidst dollar surge and Middle East tensions
Demand for dollar-denominated oil decreased among buyers using other currencies

Oil prices marked a decrease today, Wednesday, amidst the impact of a robust U.S. dollar, which reached its highest point in a month. The global benchmark, Brent crude futures, saw a decrease of 0.65 percent settling at $77.45 per barrel. Meanwhile, U.S. West Texas Intermediate crude futures (WTI) concluded at $71.92 a barrel, experiencing a slight decline of 0.66 percent. It is worth noting that, as this report was being written, WTI crude oil recorded $71.65 per barrel.

Dollar’s impact

The U.S. dollar maintained its strength, hovering near a one-month high on Wednesday. Comments from U.S. Federal Reserve officials, pushing back against expectations of aggressive interest rate cuts, contributed to the stronger dollar. This, in turn, reduced demand for dollar-denominated oil among buyers using other currencies. Additionally, forecasts for milder weather in U.S. production hubs and Europe later in January have added to the downward trend in oil prices.

Rising tensions and market response

While economic factors apply downward pressure on oil prices, geopolitical tensions in the Middle East have provided a counterbalance. Signs of escalating tensions in the Red Sea contributed to a sense of geopolitical risk. Moreover, the disruption of global shipping in the Red Sea has heightened concerns about the global movement of goods through a critical trading route. Despite the intensification of conflicts, oil traders appear cautious, waiting for concrete evidence of supply disruption before pushing prices higher. Moreover, the rise in the US dollar and investors’ aversion to risk offset concerns about tensions in the Middle East

In the wake of the Red Sea conflicts, major players in the oil industry are taking varied stances. British oil major Shell suspended shipments, responding to the strikes, while U.S. producer Chevron remains committed to its Red Sea routes. The differing responses highlight the complexity and uncertainties surrounding the impact of geopolitical events on oil market dynamics.

Read: Gold prices dip as U.S. dollar and Treasury yields rise

Oil’s outlook

Several factors suggest that oil prices in 2024 will witness a decrease compared to last year. First, the market is witnessing increased crude supply from key producers, and weaker demand growth in China, the second-largest economy globally. Hence, oil production in the U.S., Iran, and Venezuela is increasing. Despite OPEC+ supply cuts and geopolitical concerns in the region, there’s more oil available from various sources, with sources like Iran and Russia still finding their way to the market.

Moreover, an unexpected surge in U.S. oil output played a significant role in the drop in oil prices in the fourth quarter of 2023. Thus, American oil and gas companies increased production by about a million barrels per day. The U.S. Energy Information Administration (EIA) expects the global supply and demand of petroleum liquids to be relatively balanced, influencing Brent crude prices.

Finally, growing tension in the Red Sea, a critical trade route, raised concerns about potential disruptions to crude oil deliveries. Although the market has not witnessed supply disruption yet, escalations in the Red Sea could certainly impact oil prices in 2024. The impact on oil prices has been limited compared to past events such as COVID-19 and Russia’s invasion of Ukraine in 2022, which were considered black swan events for energy markets.

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