Rising Geopolitical Risk Puts Oil Prices on Course for a Weekly Gain

Crude oil prices were set to close with a gain this week as the risk of escalation in the Middle East remains elevated, OPEC expects strong oil demand this year, and U.S. inventories fall.

Propped up by these factors, the benchmark made some gains earlier this week, tempered, however, by the International Energy Agency’s latest oil market report that predicted solid supply this year, even as the IEA revised its demand projection upwards.

The gains led some commentators to suggest oil could close this week at the highest in three weeks—yet another illustration of how tough the market environment has become for oil bulls despite an abundance of otherwise bullish events.

However, these have been offset by now chronic worry about economic growth, specifically in China, and central bank monetary policy. Even the substantial production outage in North Dakota this week failed to have any palpable impact on prices—until the Energy Information Administration released its inventory report.

“It could be the US crude stock draws that finally forced the market to price in the Bakken outages and, by extension, ascribe a bit more risk premium to the Middle East crisis too,” Vandana Hari from Vanda Insights told Bloomberg. She noted that if there was “an incident [in the Red Sea] that causes major damage to life and property, at sea or on land, may become the tipping point.”

“The turmoil in the Mideast has kicked up freight and insurance rates appreciably but (has) not yet affected total global oil supply other than delaying shipments toward Europe and other regions,” Jim Ritterbusch, the president of Ritterbusch and Associates, told Reuters.

These delays, however, are causing higher costs, and the diversion of traffic from the Red Sea will drive higher fuel demand for the longer journey around Africa. This additional demand has yet to be factored in by oil traders.

By Irina Slav for Oilprice.com

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