Oil prices propped up by geopolitical concerns

Oil prices edged higher on Monday, with WTI price touching the $78.7 per barrel level. If WTI price declines, it may encounter support near $75.5 per barrel, while resistance may be found near $79.0 per barrel.

Supply concerns provide support for oil prices, as the crisis in the Gaza area threatens to disrupt oil distribution. Tensions around the Red Sea area have been rising, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution. Iran-backed Houthi militants are attacking commercial vessels in the Red Sea, raising concerns about oil supply. 

Oil prices have been rising on reports of ongoing military involvement of the US in the Middle East. Over the weekend, an Israeli war cabinet member warned that unless Hamas freed all hostages held in Gaza by the start of Ramadan on March 10th, Israel would invade Gaza's city of Rafah.

OPEC+ has decided to keep its oil output policy unchanged, maintaining the voluntary production cuts that have already been in place. The organization is enforcing substantial production cuts to keep oil prices high. The production cuts are limiting oil supply effectively, as OPEC oil output in January dropped by 410K barrels per day compared to December’s output. 

Oil prices are kept in check by a strong US dollar and high-interest rates. The Fed kept interest rates unchanged at its latest policy meeting in January, within a target range of 5.25% to 5.50. 

US inflation surprised on the upside on Tuesday, boosting the dollar and putting pressure on oil prices. Headline inflation rose by 3.1% year-on-year in January from a 3.4% print in November against expectations of a much lower reading of 2.9%. Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts.

China’s poor economic outlook is increasing concerns of reduced oil demand, putting a lid on oil prices, despite increasing geopolitical risks. Weak economic growth in China raises concerns about future demand, pushing oil prices down. 

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Written by:
Myrsini Giannouli

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