– Loss of geopolitical risk premium
London — Oil prices are falling for the second day in a row, following an upward trend that took prices to their highest levels since August of last year. Both Brent and WTI crudes are down about 0.3%.
The correction in oil prices comes after the US Energy Information Administration lowered its forecast for crude demand for the current year. Crude may also be under pressure as the geopolitical risk premium continues to decline, with a ceasefire in Gaza looming ever closer.
The agency has lowered its forecast for global demand from 104.3 to 104.1 million barrels per day (bpd) for the current year, while raising its production forecast to 104.4 from 104.2 million bpd.
On the geopolitical front, a ceasefire in Gaza is now closer than ever, according to widespread media reports. However, it has not yet been decided or signed and hopes of reaching it may be subject to collapse until the last moments – as in previous rounds, while what is new now is Donald Trump’s pressure on both sides of the conflict to end the war before his return. The agreement stipulates a truce that extends for 42 days as a first stage, followed by a second stage in which the continuation of the calm is announced, according to The Associated Press.
The conflict in Gaza, although it did not directly cause disruption to the energy market, was the spark for a large-scale regional conflict that threatened the flow of global trade through many of the region’s outlets, and settling this conflict may be the beginning of a broader peace. This development, in addition to the weakness suffered by Iran and its ally Hezbollah in Lebanon and the siege that may intensify on the Houthis in Yemen, is likely to strip crude oil of the geopolitical factor that provided some support to prices.
In contrast to these negative factors, crude stocks recorded a decline in the United States during the week according to figures from the American Petroleum Institute, in addition to the International Energy Agency’s report about that the new US sanctions may cause a significant disruption to Russian exports.
In China, the market will be watching the Chinese economyduring the Lunar New Year holiday season. Figures that reflect increased spending and improved consumer sentiment could provide further support for crude prices to continue their gains – hopes for a return to growth and a strong economy in China are key factors supporting crude prices. Signs of this narrative are already being seen, with air travel bookings up 50% this holiday compared to a year ago, according to Reuters, citing local media.
The transportation sector is also one of the key sectors that could support demand for crude in the first quarter, according to the Organization of the Petroleum Exporting Countries’ December report.
*Samer Hasn, Senior Market Analyst at XS.com
