Written by Samer Hasn, Senior Market Analyst at XS.com
Crude oil prices continue to recover from this year’s lows, rising more than 1.4% today across both Brent and West Texas Intermediate.
Oil’s gains come amid escalating geopolitical tensions on multiple fronts in the Middle East, potentially reviving concerns about the safety of supplies from the region. This could replenish the geopolitical risk premium for crude prices, which is supporting the price of oil against negative factors such as the mixed performance of the Chinese economy and the repercussions of the US-led trade war, in addition to the anticipated influx of more supplies to the market from OPEC next month.
On the geopolitical front, today saw the collapse of the ceasefire in Gaza following an unprecedented escalation in Yemen with attacks from the US and UK. This escalation in Yemen has made the market even more concerned by Donald Trump’s accusation that Iran is responsible for the attacks launched from Yemen and his threat to face consequences.
A potential escalation with Iran is precisely what could cause long-term disruption in the oil market. As tensions between Iran and the United States escalate to the point of direct military conflict, two scenarios could emerge if a historic agreement is not reached – which remains highly unlikely – such as tightening strict restrictions on Iranian oil exports (known as zero exports under the maximum pressure 2.0) or targeting either nuclear energy facilities. If the situation spirals out of control and we face a direct military escalation against Iran, this could involve targeting oil facilities and supply lines, whether in Iran itself or the region.
Both scenarios ultimately threaten to reduce supply from the region, potentially resulting in a potential spike in oil prices.
Conversely, uncertainty about the consequences of the trade war waged by the United States, both on its allies and trade enemies, contributes to keeping crude prices under pressure, along with prospects for increased supply from OPEC and the United States.
From China’s perspective, we continue to see mixed signals regarding the resilience of the Chinese economy to confront the trade war. While we saw faster-than-expected growth in industrial production, fixed-asset investment, and retail sales in the first two months of this year, unemployment unexpectedly continued to rise in February, and home prices continue to decline. This could maintain a negative outlook for domestic demand, which is expected to counteract weaker external demand due to the trade war.
This comes as China is expected to continue to lead global crude demand growth, according to the International Energy Agency’s March report. Therefore, the continued flow of mixed data from China may not support the bullish outlook for crude prices.
In the United States, recent data and mounting recession concerns continue to pressure crude prices. Yesterday, we saw mixed readings for February retail sales, with the headline reading growing weaker than expected, and the Empire State Manufacturing Index unexpectedly fell from 5.7 to -20.
Uncertainty surrounding Trump’s trade policies and their potential consequences, as well as those in the labor market, is fueling these fears of recession and declining economic activity. We may still be months away from knowing the details of the tariffs on various countries.
According to the Wall Street Journal, the Trump team is still discussing how these tariffs will be imposed and the basis on which they will be determined. The proposed plan involves imposing customized tariffs on hundreds of trading partners, which could require a huge burden and a long time to implement, possibly more than six months.
Therefore, the state of confusion and chaos in the oil market – as in other markets – may continue until the new trade policy becomes clearer.
Tomorrow, markets await the Federal Reserve’s interest rate decision and Jerome Powell’s subsequent speech. If Powell reiterates the Fed’s cautious approach to cutting rates and the need for caution, this could contribute to deepening concerns about the health of the economy, which could increase pressure on crude prices.