In a development closely watched by the economic sector, oil prices escalated on Tuesday, indicating a decline in optimism regarding the potential resolution of hostilities between Israel and Hamas. Investors’ belief that a ceasefire might be reached in the Gaza Strip diminished, casting a shadow over hopes for stability in a region pivotal to global oil production.
The financial markets responded to these geopolitical tensions, with Brent crude futures witnessing a 14-cent increase to a noteworthy $90.52 a barrel by the early hours of 0610 GMT. Moreover, U.S. West Texas Intermediate (WTI) crude wasn’t left behind, marking a 10-cent rise to $86.53.
The hopeful sentiment which had contributed to a multi-session rally succumbed to renewed unrest following the collapse of ceasefire discussions in Cairo on Monday. Such talks had previously contributed to a temporary downturn in prices, as Brent marked its first decline after five sessions, and WTI followed suit with its first in seven, under the impression that geopolitical risks might witness a downturn.
Dealing a blow to any lingering optimism, Israeli Prime Minister Benjamin Netanyahu underscored the tension by announcing on Monday the setting of an unspecified date for an Israeli incursion into the Rafah region in Gaza. Analyst Tony Sycamore of IG captured the market’s sentiment in his note, stating that this development quashed the brief hope that regional geopolitical tensions might de-escalate.
In the early hours of Tuesday, Hamas asserted that the proposals mediated by Qatar and Egypt failed to address Palestinian factions’ demands. However, the organization communicated its intention to review the proposal further before responding to the mediators.
The persisting conflict poses a risk of escalating into a wider regional confrontation, especially with Iran—a staunch ally of Hamas and a leading member of the Organization of the Petroleum Exporting Countries (OPEC)—becoming involved. An incursion by Tehran into the conflict could significantly impact the oil market, analysts from ANZ suggested in a client note, given Iran’s substantial role in global oil production.
Tehran’s promise to exact revenge after an airstrike resulted in the demise of two Iranian generals and five military advisors in Damascus—despite Israel not officially taking responsibility—has heightened apprehension regarding the situation’s stability.
Reflecting on the current geopolitical landscape, OANDA’s senior market analyst Kelvin Wong noted that the geopolitical risk premium indeed supports the current medium-term upward trend in oil prices.
Besides geopolitical factors, market analysts at ANZ pointed to broader fundamental elements that continue to bolster oil prices. A surge in India’s fuel demand, reaching an all-time high in FY 2024, driven by increased consumption of gasoline and jet fuel, was revealed through recent data. Furthermore, last week’s announcement of an uptick in Chinese manufacturing activity is anticipated to inject further growth into fuel demand.
Eyes are now set on forthcoming inflation data expected from the U.S. and China, which will provide significant insights into the economic trajectories of the two leading oil-consuming nations.
In an unrelated but impactful development across the Atlantic, Mexico’s state oil company Pemex revealed plans to cut crude exports by 330,000 barrels per day, redirecting this supply to meet domestic refinery needs. This strategic move stands to reduce the volume of oil available to the company’s U.S., European, and Asian clientele by a third.
As the world cautiously watches the unfolding events, it is clear that the intricate interplay between geopolitical dynamics and economic policies continues to have a profound influence on global markets, with crude oil being no exception.
