Oil prices rise as the crisis in the Middle East escalates

Oil prices gained strength on Monday, with WTI price climbing to the $73.0 per barrel level. If WTI price declines, it may encounter support near $70.0 per barrel, while resistance may be found near $79.0 per barrel.

Supply concerns boost 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 surged on Monday on reports of ongoing military involvement of the US in the Middle East. The US launched airstrikes on Friday and over the weekend against Iranian forces in retaliation for the previous week’s drone strikes against US troops.

Last week, OPEC+ 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. 

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

Powell delivered a hawkish interview on CBS’s show ’60 Minutes’ on Sunday, putting pressure on oil prices. Powell stated that the Fed will only proceed with interest rate cuts once they see evidence that inflation is dropping sustainably. Powell reiterated his former statement that a rate cut in March is highly unlikely and warned that the central bank will likely cut rates at a slower pace than the market expects. 

Rate cut expectations dropped sharply after Powell’s speech putting pressure on oil prices. Odds of a rate cut in March have dropped to 10%, while even rate cut odds in May are down to 60%. Most market analysts, however, believe that the central bank will start cutting interest rates by June. 

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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