Geopolitical Risk Is Pushing Oil Prices Higher But Uncertainty Remains

Crude oil prices started the week with gains as tension continued to escalate in the Middle East after Israel and Hezbollah exchanged missile strikes, but bearish sentiment in oil markets is far from being extinguished and prices fell back slightly after initial gains.

Last week, Brent crude and West Texas Intermediate booked their biggest price gains since April, according to Bloomberg, boosted by the Fed’s decision to cut rates by 0.50% and news that Beijing plans more stimulus for the economy. Brent crude has added 9% since dropping to a three-year low earlier this month, Bloomberg noted.

Yet continued trader worry about the effectiveness of that stimulus on Chinese oil demand limited price gains, along with the fact that the so-called jumbo cut by the Fed was expected. With that largely priced in, which means traders will soon turn their attention back to demand, meaning China.

“China has obviously been the key concern when it comes to demand, but there have also been reports of refiners in Europe cutting run rates due to poor margins,” ING commodity analysts wrote in a note last week.

“Geopolitical tensions in the Middle East have edged up a notch between Israel and Hezbollah, which could leave oil prices well-supported on the risks of a wider regional conflict,” IG analyst Yeap Jun Rong told Reuters.

“However, price gains have been somewhat more measured, which may reflect some reservations over the actual impact on oil supplies, given that the Middle East conflict has been dragging for some time now with little disruptions so far,” he added.

“Crude may go into a holding pattern for a bit, consolidating last week’s gains,” Vandana Hari from Vanda Insights told Bloomberg. “Market cheer from the jumbo Fed cut is keeping sentiment aloft. But at some point, we could see crude under renewed downward pressure as the Fed glow fades and oil market attention returns to the souring demand picture.”