Oil logs back-to-back gain as Middle East conflict keeps supply risk ‘elevated’

Oil futures on Tuesday notched back-to-back gains to start the week, after a rout last week sent crude to three-week lows as the latest conflict developments in the Middle East fed concerns over risks to global crude supplies.

Price moves

  • West Texas Intermediate crude for March delivery


    rose 53 cents, or 0.7%, to settle at $73.31 a barrel on the New York Mercantile Exchange, after tacking on 0.7% on Monday.

  • April Brent crude

    the global benchmark, added 60 cents, or 0.8%, at $78.59 a barrel on ICE Futures Europe.

  • March gasoline
    climbed by 0.4% to $2.22 a gallon, while March heating oil
    rose 0.7% to $2.74 a gallon.

  • Natural gas for March delivery
    settled at $2.01 per million British thermal units, down 3.5% and the lowest level since mid-April.

Market drivers

The negative developments concerning the U.S. and Iran “may keep supply risks elevated, translating to further gains” for U.S. benchmark oil prices, said Lukman Otunuga, manager, market analysis at FXTM. “Geopolitical tensions are likely to keep crude bulls in the game above $70.”

Still, upside price gains may be “capped down the road due to rapidly falling expectations around aggressive Fed [interest] rate cuts and growing concerns over China’s economy,” he told MarketWatch.

Traders continued to assess the potential threat to oil supplies after a series of weekend strikes led by the U.S. against Iran-backed paramilitaries and groups in retaliation for a drone strike last month that killed three U.S. troops. The strikes also hit Iran-backed Houthi militants in Yemen, who vowed to strike back.

Disruptions to oil production due to the war between Israel and Hamas have “so far been limited, but renewed attacks on U.S. bases in Syria on Monday point to ongoing risks of an escalation, which will likely trigger volatility in oil prices ahead,” analysts at UBS wrote in a Tuesday note.

U.S. Secretary of State Antony Blinken returned to the Middle East this week, meeting Monday with Saudi Arabia’s crown prince as he attempted to foster progress toward a ceasefire between Israel and Hamas. Signs of progress toward a ceasefire agreement — that would also set the release of Israeli hostages held by Hamas — contributed to last week’s rout in crude prices.

Beyond the uncertainty in Gaza, “tensions in the Middle East persist following the U.S. commitment to protect its troops, especially after a lethal drone strike in Jordan,” which “intensifies regional instability,” said Antonio Ernesto Di Giacomo, market analyst, Latin America, at XS.com, in market commentary.

The UBS analysts, meanwhile, noted that estimates showed crude production by the Organization of the Petroleum Exporting Countries down by 410,000 barrels a day in January, the biggest monthly fall since July.

The decline was attributed to the voluntary OPEC+ production cuts, as well as the temporary shut-in of Libya’s largest oil field. Meanwhile, U.S. crude output likely fell by around 300,000 barrels a day last month due to cold weather, they said.

“So, we continue to advise investors with a high risk-tolerance to sell Brent’s downside price risks, or to add exposure to longer-dated Brent oil contracts,” the UBS analysts wrote. “Against the current uncertain backdrop, oil and energy stocks can also be utilized to insulate portfolios from market risks.”

Over in the U.S., the Energy Information Administration’s monthly Short-term Energy Outlook report on Tuesday revealed a rise in January natural-gas consumption to a record high, driven by severe U.S. winter weather.

Read: U.S. natural-gas consumption hit a record in January. So why are prices falling?

The government agency on Wednesday will release its weekly petroleum supply data. On average, analysts polled by S&P Global Commodity Insights expect the data to show a climb of 600,000 barrels in commercial, domestic crude supplies for the week ended Feb. 2. They also forecast an inventory rise of 300,000 barrels for gasoline, and a decline of 2.4 million barrels in distillate stockpiles.

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