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Oil Steadies as Risks in the Middle East Struggle With Soft Fundamentals

Oil Steadies as Risks in the Middle East Struggle With Soft Fundamentals

Oil steadied as the risk that airstrikes by the US and allies against the Houthis would ignite a wider conflict and disrupt crude flows from the Middle East was balanced by soft fundamentals.

Brent crude traded below $79 a barrel and West Texas Intermediate was near $73 after the US followed up the initial strikes against targets in Yemen with a fresh attack on a radar installation and also downed a Houthi cruise missile on Sunday. While the global benchmark was up more than 4% at one point on Friday, it ended the session with a relatively modest gain of 1.1%.

Global oil markets have been transfixed by the situation in the Middle East since the Hamas attack on Israel on Oct. 7. The strikes on the Houthis were in retaliation for the group’s harrying of ships in the Red Sea over the last couple of months. The Iran-backed militants have vowed not to let up until Israel ends its assault in the Gaza Strip.

The price reaction suggests the market doesn’t, at this point, see a high chance that the evolving conflict will spread and endanger crude production and flows from the wider Middle East, which accounts for around a third of the world’s oil. Instead, the prospect of rising supply from non-OPEC countries and slowing demand growth looks to be taking precedence. Trading volumes will likely be lower on Monday due to a holiday in the US.

“For now, developments in the region are not having an impact on oil supply,” said Warren Patterson, head of commodities strategy for ING Groep NV. “And in the absence of supply disruptions, the oil market remains comfortable over the first half of the year, despite heightened tensions.”

The setup for crude appears tough this year. While demand is still growing, it’s expected to do so at a markedly slower pace as the post-pandemic rebound dissipates. There are also question marks around whether production cuts announced by the Organization of the Petroleum Exporting Countries and allies will be enough to offset an impending surplus.

Still, the increased tensions in the Middle East are disrupting crude flows to a certain extent. At least three oil tanker owners, which between them marshal more than 350 vessels, said Friday they were pausing voyages through the southern Red Sea. More are likely to follow suit after advice from Western military forces that all ships should stay away from the area.

A vessel hauling Russian oil had a narrow miss with a missile fired from Yemen, according to the UK navy. A Houthi-operated TV channel also said fighter jets had hit targets in a new strike on Sunday evening, although there was no immediate confirmation from the US or UK militaries.

“As the Middle East conflict is currently not affecting oil production, the geopolitical risk premium priced in oil prices now appears modest,” Goldman Sachs Group Inc. said in a note. Prices are likely to be range-bound as high spare capacity caps the upside, while low recession risk and responsive OPEC+ supply limit the downside, they said.



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