- Oil prices are trading higher in the first week of 2024 as global geopolitical tensions offset soft economic data.
- The market still expects the Fed to deliver at least several rate cuts this year.
- If implemented, this could reduce consumer borrowing costs and boost demand for travel and oil.
Oil prices rose in the first few sessions of the new year, driven by heightened tensions in the Middle East.
The already difficult situation escalated after the US Navy took action against three Houthi boats, and Maersk, a major shipping company, suspended transit through the waterway following an attack by Houthi rebels on one of its vessels.
Investors are closely monitoring these geopolitical developments as they unfold, which may influence oil markets and broader financial dynamics in the early days of the new year. Oil prices rose about 5% from their 2023 close.
Heightened Geopolitical Tensions
Shares in major European shipping and oil stocks have been volatile in recent weeks as investors were digesting news headlines from the Middle East. The Red Sea tensions also coincided with a more optimistic outlook for Chinese crude demand, contributing to the upward momentum in oil prices.
"The situation in the Red Sea has forced a lot of refiners and buyers of crude oil to go to the United States rather than sail their boat around the Horn of Africa," said Bob Yawger, director of energy futures at Mizuho.
The risk-off sentiment pushed stocks lower while in the currency markets, the dollar strengthened against most major currencies as 2024 trading commenced cautiously.
As a result, the Santa Claus Rally has failed to materialize this year amid increased risk sentiment, reflecting the geopolitical uncertainties and potential disruptions in global trade routes.
Oil prices have received another boost following a deadly blast in Teheran, which killed at least 84 persons. Iran is one of the biggest oil producers and investors fear that their involvement in the Gaza-Israsel conflict could further deteriorate the situation in the Middle East.
Iran initially blamed Israel and the US for the attack, which took place during the event that marked the anniversary of their senior army commander Qasem Soleimani, who was assassinated by the US.
Iran's Supreme Leader Ayatollah Ali Khamenei urged to deliver a "harsh response" to the bomb blasts, a statement that is likely to support oil prices in the near term.
Moreover, oil prices gained on Wednesday following media reports about protests at Libya's largest oilfield. Libya, an OPEC member, said the protest has forced its government to shut down an oilfield that produces 300,000 barrels per day (bpd).
In response to the deteriorating situation in the Middle East, the US Secretary of State Antony Blinken is said to be prepared to visit the Middle East as the world’s most powerful country attempts to diffuse tensions.
"There is still plenty of tension in the Middle East with Houthi rebels launching a sea drone in the Red Sea, a US airstrike in Baghdad," ING commodity analysts wrote.
FOMC Minutes Release Another Positive for Oil Prices
Several events in the United States also impacted oil prices this week. The most important one includes the release of the minutes from a Federal Reserve meeting in December.
Although the minutes didn't specify the timing of rate cuts, they highlighted a growing confidence in managing inflation while expressing concerns about the risks associated with an "overly restrictive" monetary policy.
Lower interest rates, if implemented, could reduce consumer borrowing costs, potentially stimulating economic growth and increasing oil demand.
Still, stocks headed lower as some FOMC members pushed back against rate cuts being implemented in March, which is the current market consensus.
Increased geopolitical tensions and the FOMC minutes release offset bearish data from the United States, which showed substantial increases in weekly gasoline and distillate stocks.
The US Energy Information Administration's report highlighted the highest week-on-week rise in gasoline stocks in over 30 years, while distillate products supplied, indicating demand, reached its lowest level since 1999.
"The key Northeast region is still indicating relatively mild temperatures well into the 3rd week of this month in likely limiting diesel gains," said Jim Ritterbusch, president of Ritterbusch and Associates LLC in Illinois.
Moreover, the oil prices were also under pressure during the week following discouraging economic data. Business activity in the Eurozone contracted in December, reflecting economic challenges.
Despite these negative factors, geopolitical concerns, optimism about economic recovery linked to potential interest rate easing, and ongoing shipping worries contributed to offsetting the bearish sentiment.
Earlier in December, Goldman Sachs (NYSE:GS) commodity strategists slashed their 2024 Brent prices forecast by $10 to $80 a barrel (up or down $10). Strategists said they now expect only a modest deficit and slightly less elevated long-dated prices.
“We still look for range-bound prices and only moderate price volatility in 2024. Elevated spare capacity to handle tightening shocks should limit upside price moves.
The OPEC put, strategic China and US restocking, and modest recession risk should limit downside risk to prices,” commodity strategists team led by Daan Struyven wrote in a client note.
The investment banking giant also expects to see full extensions of the OPEC+ cuts, which were announced in April 2023. They expect these cuts to last through 2025.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.