Oil prices bounced back from last week’s selloff as Middle East tensions escalated, including an attack on a vessel in the Red Sea and Israeli tanks reaching the center of Rafah. West Texas Intermediate crude rose 2.7%, settling above $79 a barrel.
The gains followed a drop to three-month lows last week, bringing futures into oversold territory. The geopolitical risk premium returned with the attack on a Greek-managed bulk carrier in the Red Sea and Israel’s advance into southern Gaza, which highlighted renewed risks to oil supply.
“A confluence of factors suggests some upside sensitivity in oil — from fraught geopolitics to inventory drawdown to OPEC’s assumed preference to maintain curbs,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank Ltd. However, he added, “The Gaza situation is a warning not to be aggressively short, but not quite the unbridled bullish trigger.”
Additional risks included the killing of an Egyptian soldier in a clash with Israeli troops at a Gaza border crossing and an Israeli strike that killed an estimated 45 Palestinians at a displaced persons camp. Despite the ongoing conflict, crude flows from the Middle East, which accounts for a third of global supply, remain unaffected, although Houthi attacks in the Red Sea have rerouted some flows.
Oil prices have risen this year due to persistent geopolitical risks and OPEC+’s output cuts of approximately 2 million barrels a day. The group is expected to extend these curbs into the second half of 2024 at an upcoming meeting. However, prices have dipped since early April amid signs of weak demand, causing Brent’s prompt spread to approach a bearish contango structure, indicating ample supply relative to consumption.
Investors will also be watching for signs of U.S. fuel demand following the Memorial Day holiday, which traditionally marks the start of the summer driving season.
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