Oil prices hit the $80 mark amid a tug of war between weak demand and the Middle East risk premium

Oil prices hit the $80 mark amid a tug of war between weak demand and the Middle East risk premium

Oil markets are once again focused on the Middle East as short-term geopolitical premiums support prices. In the tug-of-war between the bearish fundamentals and the Middle East risk premium, international oil prices returned to $80 / barrel in intraday trading.

In the early morning of January 12 local time, the targets of the Houthi armed forces in Yemen were attacked by the United States and the United Kingdom, which were confirmed by the United States, the United Kingdom and the Houthi armed forces. According to Iran's Islamic Republic News Agency, the Iranian Navy seized an American oil tanker in the Sea of Oman on the 11th, "in retaliation for the theft of Iranian oil by the United States." According to the report, the tanker "stole" Iranian oil and handed it over to the United States last year on American orders. The tanker is currently being transferred to an Iranian port and will be handed over to Iranian judicial authorities.

The two emergencies combined with extreme weather in the United States and the expectation that crude oil production will decline, stimulated the two major crude oil futures to rise significantly on the 12th, Brent oil prices once returned to $80 / barrel, and WTI oil prices stood at $75 / barrel. As of press time, the New York Mercantile Exchange February delivery WTI crude oil futures rose 2.89%, 74.10 USD/barrel; London Brent crude for March delivery was up 2.79% at $79.57 a barrel.

The escalation of conflict in the Middle East and the impact of oil prices

The US and UK air strikes on the Houthis marked a further escalation of the spilover effect of the new Israeli-Palestinian conflict that has dragged on for nearly 100 days, and investors are assessing the possibility of a wider conflict in the Middle East. The Iranian navy's seizure of an American oil tanker adds to the current tensions.

Since the second half of 2023, despite Saudi Arabia leading its Allies to stick to production cuts, the outlook for oil prices has dimmed due to rising supply from non-OPEC + producers and slowing demand growth. The biggest wild card for the oil market remains that a direct Iranian involvement in the conflict would introduce a new risk premium to the market.

"Price volatility is here to stay as the situation develops." Vandana Hari, founder of consulting firm Vanda Insights, believes there is an unbalanced tug-of-war between the fundamentally bearish outlook for the oil market and the support of risk premiums in the Middle East. For now, both will continue to play a role.

Ben Luckock, head of oil trading at commodities trader Trafigura, said oil markets are less nervous about security of supply threats from the Middle East due to ample supply elsewhere, and prices are expected to remain range-bound in 2024.

"The market saw the escalation of the conflict and pushed oil prices back up." Giovanni Staunovo, a commodities strategist at UBS, stressed that the risk premium will only persist if there is a supply disruption. He predicted higher oil prices in the coming months, with Brent prices above $80 per barrel, led by a slightly undersupplied oil market due to ongoing OPEC+ production cuts.

Saxo Bank market strategist Charu Chanana believes the airstrikes increase the risk of escalation, which could put oil and safe-haven demand in focus in the short term. If the conflict escalates, oil prices face upside risks. Volatility is likely to increase as the market continues to assess the impact of OPEC+ cuts, non-OPEC + supply, and the demand outlook in the United States and China.

Amid tensions in the Middle East, Citi reiterated its bearish position on the oil market. The bank cut its 2024 Brent oil price forecast by $1 to $74 a barrel and its 2025 forecast by $10 to $60 a barrel, citing concerns about oversupply in the market. However, it also warned that the crisis in the Red Sea has led to further tensions in the Middle East, and risk premiums may rise in the short term.

Why the United States and Britain are fighting the Houthis

According to Xinhua News Agency, since the outbreak of a new round of Israeli-Palestinian conflict, the Houthi armed forces frequently attacked ships associated with Israel in the Red Sea waters to show their support for Palestine. According to the US military, since November 19 last year, the Houthi armed forces have launched 27 attacks on the international shipping lanes of the Red Sea. The United States led the formation of the "escort coalition" in December last year, and at the beginning of this month, the "ultimatum" asked the Houthi armed forces to stop the attack, while the Houthi armed forces on the 9th launched a "large number" of drones and missiles at a US ship "providing support for Israeli ships" in the Red Sea waters.

US President Joe Biden said in a statement on the 11th Eastern time that the US military has struck a number of targets of the Houthi armed forces in Yemen. Britain took part in the strikes, with support from Australia, Bahrain, Canada and the Netherlands. He said the strikes were "a direct response to the ongoing attacks by the Houthis on international commercial vessels transiting the waters of the Red Sea."

The Houthis said the airstrikes were a "massive act of aggression" for which the United States and Britain would "pay a heavy price."

Some analysts said that behind the military strike, there is also a hidden purpose of the United States and the United Kingdom to "shock the tiger" - the "mountain" to be beaten is the Houthi armed forces, and the "tiger" to be deterred is Iran, which is accused by the United States of providing military and political support to the Houthi armed forces. After a commercial vessel was attacked by the Houthis in the waters of the Red Sea, the United States publicly said that Iran "bears responsibility for these attacks" because of its close relationship with the Houthis.

Analysts pointed out that US Secretary of State Blinken just concluded a week-long trip to the Middle East, and ignored the call of many countries for an immediate ceasefire in the Gaza Strip, which was widely questioned. The US and UK air strikes will not help ease tensions in the Middle East, but may add fuel to the fire and make the situation in the region more dangerous and complex.

 The Red Sea is an important international trade route for goods and energy. We hope that all relevant parties can play a constructive and responsible role in maintaining regional security and stability in the Red Sea, which serves the common interests of the international community.

Yemen's neighbor Saudi Arabia has expressed "grave concern" over the US and UK strikes against the Houthis. The Saudi government stressed the importance of maintaining security and stability in the waters of the Red Sea, while calling for "restraint and avoiding escalation of the situation," the Saudi Press Agency quoted a Saudi Foreign Ministry statement as saying.

On the same day, the Iranian government strongly condemned the US and UK military strikes against the Houthi armed forces in Yemen, believing that this practice further destabilizes the regional situation. Iran's Press TV quoted Foreign Ministry spokesman Nasser Kanani as saying that the United States and Britain "wanton attacks will only increase insecurity and instability in the region." He called on the international community to take measures to prevent the conflict from widening.