Oil prices volatile on supply vs demand battle

Oil prices were volatile on Wednesday, with WTI price dipping to $70.5 per barrel in early trading and then surging to $72.5 per barrel later in the day. If WTI price declines, it may encounter support near $70 per barrel, while resistance may be found near $75.1 per barrel.

China’s poor economic outlook is increasing concerns of reduced oil demand, pushing oil prices down despite increasing geopolitical risks. Weak economic growth in China raised concerns about future demand on Wednesday, pushing oil prices down. China’s GDP data released on Wednesday were disappointing, showing that the country’s economy remains sluggish. China’s economy expanded by 5.2% year-on-year in the final quarter of 2023, which fell short of expectations, lowering the oil demand outlook. 

Supply concerns outweighed the weak oil demand outlook on Wednesday, as the crisis in the Gaza area threatens to disrupt oil distribution. Geopolitical tensions are rising in the Red Sea, spilling over the region from the war in Gaza. Tensions around the Red Sea area have been rising in the past few weeks, 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. Iran has refused to withdraw its support from the Houthi militants and has even sent a warship to the trading route. A Marshall-Islands-flagged oil tanker was boarded last week by an armed group in Oman, with reports suggesting that Iran had claimed responsibility for the attack. The incident raised the prospect of escalating conflict in the Middle East causing volatility in oil prices. 

The US and the UK have launched a coordinated action against Houthi rebels in Yemen on Thursday night. The coalition delivered a series of air and sea strikes against Houthi targets in Yemen, risking retaliation from Iran. Oil tankers diverted course from the Red Sea, boosting oil prices on Friday, as traders feared potential retaliatory attacks.

Oil prices are kept in check by a strong US dollar and high-interest rates. Most major central banks, however, are hitting pause on rate hikes, boosting oil prices. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. Market expectations of future rate cuts increase oil demand outlook, boosting oil prices. In addition, OPEC+ producers have agreed to voluntary cuts of over 2 million barrels per day to boost oil prices, extending already existing output cuts into the first quarter of 2024 and adding even more.

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Written by:
Myrsini Giannouli

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