Oil Steadies as Geopolitical Tensions Rise Before OPEC+ Meeting

Oil prices stabilized on Wednesday after two consecutive days of gains, despite escalating tensions in the Middle East following the death of an Egyptian soldier during a clash with Israeli troops.

The global benchmark Brent crude remained steady at around $83 per barrel, while West Texas Intermediate (WTI) inched closer to $79. The Egyptian military confirmed the death of a border guard at the Rafah crossing into Gaza on Monday, which could potentially heighten tensions with Israel.

Throughout this year, oil prices have been on the rise due to ongoing geopolitical risks and the output cuts of approximately 2 million barrels per day by the OPEC+ group. These cuts are expected to be extended into the second half of 2024, as confirmed during a meeting on Sunday. However, prices have faced a decline since early April due to weakening demand from Asia. This has caused Brent’s prompt spread to approach a bearish contango structure, indicating that supply is increasing relative to consumption.
According to Vishnu Varathan, the chief economist for Asia ex-Japan at Mizuho Bank Ltd, several factors indicate a potential increase in oil prices, including geopolitical tensions, inventory drawdown, and OPEC’s commitment to production cuts. However, Varathan also notes that the situation in Gaza serves as a warning against overly aggressive short-selling, rather than a significant bullish trigger.

The recent death of an Egyptian soldier, coupled with Israeli airstrikes on a displaced people’s camp that drew condemnation from governments worldwide, adds further risk to oil markets. However, the conflict has thus far remained contained, and there have been no significant disruptions to crude flows from the Middle East, which accounts for roughly a third of global oil output. Some supply has been rerouted due to Houthi attacks in the Red Sea, but overall, the impact on oil markets has been limited.
Additionally, investors will be monitoring US fuel demand data following the Memorial Day holiday, as this period typically signifies the beginning of the high-demand summer driving season.