Market Overview
The oil market experienced a surge on Tuesday, driven by concerns over limited supply from Russia and Iran due to Western sanctions. The Brent crude futures settled at $77.05 a barrel, up 75 cents or 0.98%, while the U.S. West Texas Intermediate (WTI) crude finished at $74.25 a barrel, up 69 cents or 0.94%.
Supply Constraints and Demand Expectations
Traders are eagerly awaiting the Chinese stimulus plans to drive growth as supplies are tight following the Christmas and New Year’s holidays. According to Forex market analyst Razan Hilal, "While the market is currently range-bound, it is recording gains on the back of improved demand expectations fueled by holiday traffic and China’s economic pledges." However, Hilal also noted that "the primary trend remains bearish."
Middle Eastern Oil Demand and Saudi Arabia’s February Prices
Some market participants have begun to price in small supply disruption risks on Iranian crude exports to China. This has led to an increase in demand for Middle Eastern oil, reflected in a rise in Saudi Arabia’s February oil prices to Asia. It is worth noting that this marks the first such increase in three months.
Sanctions and Supply Chain Disruptions
The ongoing sanctions against Iran have resulted in concerns over supply chain disruptions. This has led to an increase in demand for alternative oil sources, particularly from the Middle East. The Shandong Port Group in China issued a notice banning U.S.-sanctioned oil vessels from its network of ports, potentially restricting blacklisted vessels from major energy terminals on China’s east coast.
Cold Weather and Heating Oil Demand
The cold weather in the U.S. and Europe has boosted heating oil demand, contributing to the increase in oil prices. However, global economic data has capped price gains. The Euro zone inflation accelerated in December, an expected blip that is unlikely to derail further interest rate cuts from the European Central Bank.
Market Analysis and Predictions
Analysts are divided on the outlook for oil prices. While some see a rise in prices driven by demand expectations, others believe that the primary trend remains bearish. Technical indicators for oil futures are now in overbought territory, which could lead to sellers stepping in again to take advantage of the strength.
Upcoming Economic Data and Its Impact on Oil Prices
Market participants await more economic data, including the U.S. December non-farm payrolls report on Friday. The outcome of this report will likely influence oil prices. According to Phil Flynn, senior analyst with the Price Futures Group, "We have a very tight physical market and see demand exceeding supply. That should lead to more drop downs of inventories around the globe."
Conclusion
The oil market is experiencing a surge driven by concerns over limited supply from Russia and Iran due to Western sanctions. While some analysts believe that the primary trend remains bearish, others see a rise in prices driven by demand expectations. The outcome of upcoming economic data will likely influence oil prices.
Market Participants’ Quotes
- "While the market is currently range-bound, it is recording gains on the back of improved demand expectations fueled by holiday traffic and China’s economic pledges." – Razan Hilal, Forex market analyst
- "The primary trend remains bearish." – Razan Hilal, Forex market analyst
- "Some market participants have apparently started to price in small supply disruption risks on Iranian crude exports to China." – Giovanni Staunovo, UBS analyst
- "Higher inflation in Germany raised suggestions the ECB may not be able to cut rates as fast as hoped across the euro zone." – Ashley Kelty, Panmure Liberum analyst
- "We have a very tight physical market and see demand exceeding supply. That should lead to more drop downs of inventories around the globe." – Phil Flynn, senior analyst with the Price Futures Group
References
- Seba, E. (2023). Oil prices rise on concerns over limited supply from Russia and Iran. Reuters.
- Hilal, R. (2023). Market analysis: Oil prices settle higher on Tuesday. Forex market analysis.
- Staunovo, G. (2023). UBS analyst sees small supply disruption risks on Iranian crude exports to China. UBS research report.
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