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Rising geopolitical tensions and their impact on Oil markets

oil analysis, forex trading

The growing tensions between Iran and Israel are prompting oil traders to reconsider the additional costs linked to geopolitical risks in an already strained market. The supply and demand dynamics have been tight, pushing oil prices to surpass $90 per barrel. This reevaluation involves factoring in the potential for increased instability which could further drive up prices if the conflict escalates.

The recent attack by Iran on Israel represents a significant escalation in the ongoing conflict, shifting from engagements conducted through proxy forces to direct confrontation. Iran has stated that its retaliatory strike in response to the bombing of its embassy in Syria marks the end of this specific series of retaliatory actions. However, Israel has maintained its stance that it may respond, indicating that the conflict could continue to escalate.

Giovanni Staunovo, a commodities analyst at UBS Group AG, predicts that oil prices are likely to experience an initial spike when trading resumes, attributing this to the unprecedented nature of Iran’s direct attack from its own territory on Israel. The subsequent price trends will depend significantly on how Israel chooses to respond, which remains a pivotal factor in the financial markets.

When trading starts again at 6 pm in New York on Sunday, the market has already partially adjusted to the possibility of an Iranian attack on Israel, influenced by the recent strike on Iran's embassy. This event propelled Brent crude prices, which had been up 17% for the year, to move past the $90 mark following the incident.

Following Iran's aggressive retaliation, oil traders are likely to increase their scrutiny of the Strait of Hormuz. This strait is a crucial bottleneck for global oil transportation, handling about one-fifth of the world's oil supply. The possibility of disruptions in this area could lead to further increases in the oil risk premium, particularly if there are any new attacks on oil tankers navigating through the region.

Iran's recent seizure of a container ship near the Strait of Hormuz, alleging its association with Israel, underscores the heightened risks in the region. This event comes in addition to disruptions caused by Iran's regional allies, the Houthis in Yemen, who have targeted vessels in the Red Sea. Although these attacks have not directly hindered oil supplies, they have resulted in increased shipping costs and compelled oil tankers to undertake longer journeys, indirectly boosting oil demand.

According to Iman Nasseri from the consultancy FGE, the current market prices already incorporate a risk premium of approximately $10 per barrel. He suggests that concerns over potential Israeli counteractions or further Iranian disruptions in the Persian Gulf region might push this premium higher by an additional $2 to $5 per barrel.

The Middle East's ongoing instability is adding to the risk premium in an oil market where strong demand meets a tightly controlled production policy by OPEC+. This combination is helping to deplete global oil stockpiles and drive prices higher, reflecting a market sensitive to both supply constraints and geopolitical tensions.

Last week, the Vitol Group, the world's leading oil trading company, indicated that oil demand growth this year might exceed existing forecasts. This view is supported by Seb Barrack from Citadel, who expects the oil market to tighten significantly towards the end of the year, suggesting a bullish outlook for oil prices in the near term.

Ayham Kamel from the Eurasia Group highlights that energy markets are increasingly acknowledging the possibility that the Iran-Israel conflict could widen. He points out the risk of a spiraling cycle of miscalculations that could lead to further escalation, affecting global oil markets and international relations more broadly. This growing acknowledgment is shifting how market participants strategize and react to geopolitical developments.

XTI/USD daily chart, MetaTrader, 14.04.2024



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