The premium on crude oil rising as geopolitical tensions in the Middle East continue to escalate
As I drove past the next-door gas station last Saturday, I couldn’t help but feel elated. Just a few days earlier, on Wednesday, I had filled my gas tank at a significantly lower price compared to the weekend. The price difference was considerable, and I ended up saving money.
On Friday, as the week ended, oil prices settled higher, up about six percent on a week-on-week basis. Geopolitical factors continued to have the most significant impact on oil prices. Concerns over supply disruptions in the Middle East were increasing, while ongoing outages were causing tightening in refined products markets. Interestingly, this increase followed a seven percent loss in the preceding week.
Visiting U.S. Secretary of State Antony Blinken presented a proposal to Benjamin Netanyahu, urging him to agree to a humanitarian ceasefire and cease hostilities. However, the Israeli prime minister declined the proposal and persisted with the deadly airstrikes on the Gaza Strip on Friday. The bombing of the Palestinian southern border city of Rafah on Thursday had already contributed to a roughly three percent increase in oil prices.
All of this signalled to the markets that the regional hostilities were likely to continue, leading to the resurgence of the geopolitical risk premium in oil markets. “With the words that, ‘no part of the Gaza Strip would be immune from Israel’s offensive’, it was not hard for oil participants to conclude that without even a passing regard for peace, there was not enough conflict-premium priced in,” said John Evans, an analyst at PVM. And it went up.
The decrease in OPEC+ output also played a role in tightening crude markets. According to a survey by S&P Global Platts, oil production among OPEC+ members experienced its most significant decline in six months in January.
The survey indicated that output cuts agreed upon last year, along with field outages in Libya, resulted in a combined monthly decline of 340,000 barrels per day in OPEC+ production. The total production was recorded at 41.21 million barrels daily, with OPEC output at 26.49 million barrels daily and its partners’ output at 14.72 million barrels daily, as highlighted by Charles Kennedy in his article for Oilprice.com.
The Platts figures also confirmed a Reuters survey from the end of January, which also found that OPEC+ production for the month had fallen by the most since July last year. That survey, however, pegged the decline in production at 410,000 bpd compared with December. In December, OPEC+ output had increased, earlier surveys had shown.
Adding to oil market woes, major shipping companies are now warning that the security situation in the Red Sea is continuing to deteriorate. Bloomberg reported that the area grew even more volatile after the U.S. and U.K. launched airstrikes in the middle of last month, prompting major owners in all sectors to avoid the region.
“The market is holding its breath on what the next potential fallout could be,” John Kilduff, partner with Again Capital LLC, told the media. Attacks on shipping by Iranian-backed Houthi rebels continued to disrupt global oil trading, he added.
To control the situation, the U.S. launched major retaliatory airstrikes on Feb. 2 against Iran’s Islamic Revolutionary Guard Corps and allied militias in Iraq and Syria. The airstrikes, which hit more than 85 targets, came in response to the deaths of three U.S. troops in a drone strike by Iran-allied militants.
The U.S. and the U.K. also launched strikes the next day against Houthi militants in Yemen. “That’s coming dangerously close to firing up the hornets’ nest in Iran – how long can they sit there while their allies get pounded one after another,” Bob Yawger, managing director and energy futures strategist at Mizuho Americas, told CNBC. The risk that the Middle East is heading toward a broader conflict is rising, Spencer Kimball said while writing for CNBC.
The theatre of war is slowly expanding. And this is translating into a rising war premium on crude oil.
Several factors are impacting the crude markets. The escalating gas prices at my neighbourhood gas station should be viewed within this broader context.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.
For interview requests, click here.
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