Oil Prices React to Geopolitical Risks Amidst Soft Fundamentals

Highlights:

• Oil prices inched higher due to concerns over a potential escalation in the Middle East conflict following US-led airstrikes against the Houthis.
• However, the market response remained relatively modest as global attention remained divided between geopolitical risks and softer market fundamentals.
• Since the October 7 Hamas attack on Israel, the Middle East has been a focal point for global oil markets. Retaliatory strikes against the Houthis,

Geopolitical Tensions Trigger Modest Oil Price Rally

Oil prices experienced a slight uptick as concerns over potential wider conflict in the Middle East, stemming from US-led airstrikes against the Houthis, clashed with softer market fundamentals. Brent crude approached $79 per barrel, and West Texas Intermediate hovered around $73. The US conducted additional strikes, targeting a radar installation after the initial offensive in Yemen. Despite an initial surge of over 4% on Friday, the global benchmark ended the session with a more moderate 1.1% gain.

Middle East Unrest Captures Global Market Attention

Since the October 7 Hamas attack on Israel, global oil markets have closely monitored developments in the Middle East. The recent strikes on the Houthis were retaliation for their disruption of shipping in the Red Sea. The Iran-backed militants, in turn, have vowed to persist until Israel ceases its Gaza Strip assault.

Market Assessment: Risk Mitigation or Fundamentals?

Market response suggests that, for now, there is perceived low risk of the conflict spreading to endanger crude production in the broader Middle East, which contributes about a third of the world's oil. Instead, the focus appears to be on the potential for increased supply from non-OPEC countries and a slowdown

in demand growth.

Analyst Perspective: Supply Disruptions Unlikely

Warren Patterson, Head of Commodities Strategy at ING Groep NV, noted, "For now, developments in the region are not having an impact on oil supply. In the absence of supply disruptions, the oil market remains comfortable over the first half of the year, despite heightened tensions."

As geopolitical tensions continue to unfold, the delicate balance between regional risks and broader market fundamentals will play a pivotal role in shaping the trajectory of oil prices in the coming weeks.

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