Geopolitical risk to keep the floor below oil prices for now

Geopolitical tensions affecting major oil suppliers in Eastern Europe and the Middle East should continue to support crude oil prices, although analysts have wondered how much longer.

Moscow on Sunday challenged London’s claims that the Kremlin was working to replace Ukraine’s government with a pro-Russian administration, similar to that of former Ukrainian President Viktor Yanukovych, ousted in a pro-Western revolution in 2014 .

Russia is wary of what it sees as Western interference in former Soviet territory, while Western powers are concerned about attacks on the sovereignty of Ukraine, which has distanced itself from Russia since the revolution of 2014. This revolution saw Russia annex the Ukrainian peninsula of Crimea.

Ukraine is home to an extensive network of Soviet-era pipelines, including sections of the Druzhba crude oil pipeline, the world’s longest. This highlights the risk these tensions pose to energy markets. The US economy, meanwhile, is heavily dependent on refined petroleum products from Russia, such as fuel oil, which complicates some of the sanctions scenarios for Western powers.

These tensions, coupled with recent blackouts in Kazakhstan, war-torn Libya and bombings in the oil-rich United Arab Emirates, have helped push the price of crude oil to new heights. West Texas Intermediate, the US benchmark for the price of oil, ended Friday above $85 a barrel.

“Geopolitical risks have certainly returned to center stage in a tighter oil market, leaving prices vulnerable to the upside and that will likely lead to a volatile week,” said Paul Hickin, head of S&P Global Platts. “But with concerns about inflation and potential monetary tightening and the build-up of global oil inventories, the bullish momentum may find reason to stall, especially since fundamentals haven’t tightened as much as prices suggest.”

Some recent risk factors, such as the unrest in Libya, have faded. U.S. monetary policymakers, meanwhile, are working to cool an overheated economy by scaling back measures to stimulate the economy. Consumer inflation is hovering around 7%, well above the Federal Reserve’s 2% target.

For energy goods, however, inflation is approaching 50% for the 12 months ending in December. We will see how the Fed reacts to these numbers on Wednesday.

Nevertheless, the demand for petroleum and petroleum products appears to exceed supply. Commercial crude oil inventories in the United States, for example, are 8% below average for this time of year.

Clay Seigle, chief executive of energy data firm Vortexa, said that even with the gradual return of production and exports from countries like Libya, other producers, including those in the shale play in the United States , seem limited.

“In this environment, crude oil prices have plenty of room to move up, and there is no magic ceiling at the $100 level,” he said.

But these high prices may prove to be their own downfall. At $100 a barrel of oil, a price last seen in July 2014, producers could start chasing demand, along with profits, and putting more crude on the market.

COVID, again

Claudio Galimberti, senior vice president of analysis at Norwegian consultancy Rystad Energy, added that the market may be underestimating the current economic impact of the COVID-19 pandemic. US hospitals are grappling with capacity issues, while the UK government is looking into a sub-variant of the highly contagious omicron strain of the novel coronavirus that causes COVID-19.

This demand pressure, coupled with the prospect of fading geopolitical risks – at least in the Middle East – could cap crude oil prices.

“I would bet that prices on Friday will be lower than today,” Galimberti said.

An indicator of US manufacturing activity in January starts the week, followed by the latest reading of consumer confidence. The big fireworks show will take place on Wednesday when the Federal Reserve is expected to make its final rate decision.

Thursday could also be a choppy trading day, with data on everything from economic growth readings to durable goods orders. Friday brings the weekly report on drilling activity in North America as well as personal spending data.


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Felix J. Dixon