Oil recently hit its highest point in five months as Israel gears up for possible retaliatory actions from Iran following its attack on the Iranian embassy in Syria.
The global benchmark, Brent crude, experienced a 0.6 percent increase in early trading, surpassing $91 per barrel – a peak not seen since October. The US-produced West Texas Intermediate also saw a rise of 0.5 percent, exceeding $87.
So far this year, crude oil has escalated by 18 percent, influenced by geopolitical tensions in the Middle East and Ukraine, alongside supply cuts by the OPEC cartel and its allies aimed at boosting prices.
Surprisingly robust demand in developed economies, despite the highest interest rates in over a decade, suggests a sustained appetite for oil. The U.S. economy is performing better than anticipated, and China’s economic activity is picking up pace.
This strong demand faces challenges from several factors threatening to limit oil production during an already tight market period. Last month, Opec+, led by Saudi Arabia and Russia, decided to reduce its output by 2.2 million barrels per day until June. However, if some member countries maintain their current production levels, they might exceed their reduced supply quotas, potentially leading senior Opec+ officials to urge members to decrease production to meet the group’s aggregate target.
According to the International Energy Agency, based in Paris and specializing in oil and gas sector analytics, reduced production by nations outside Opec+ is likely to keep the market in a deficit throughout the year.
The possibility of conflict in the Middle East disrupting major oil tanker routes adds to the risk of market instability.
This unease over a potential future imbalance between supply and demand is leading traders to place a higher value on immediate access to oil inventories, to prevent missing out on available stock. Analysts at Goldman Sachs have noted that this situation has elevated “time spreads” – the difference in price between contracts for immediate commodity access versus future delivery. This has sharply increased spot prices, as buyers are eager to pay any amount to secure available supplies while production struggles to accelerate, according to Goldman Sachs analysts.
A resurgence in oil prices could reignite worries about central banks’ capacity to return inflation to the usual 2% target over the long term. The European Central Bank, the Bank of England, and the US Federal Reserve are planning to lower their interest rates for the first time since the start of the Covid-19 outbreak, following a gradual decrease in inflation over the past 18 months.
Bank of America analysts have stated, “While the shift in commodity prices might not question the start of the cutting cycle in June, it could prevent the ECB from hastening the cycle in December.”
