Crude Oil Market Update: China Demand Worries Outweigh Mideast Turmoil Crude Oil Market Update: China Demand Worries Outweigh Mideast Turmoil

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On Monday, crude oil futures took a surprise turn, reversing a three-day gaining streak. Despite the tragic drone attack by Iran-backed Houthi terrorists on a U.S. base in Jordan, oil prices saw a decline. This unexpected fall occurred even as concerns over heightened conflict in the Middle East loomed large. The market’s reaction gives a glimpse into the forces at play, where geopolitical tensions, however dire, are overshadowed by broader economic concerns.

Earlier in Asian trading, oil prices had inched higher following the attack. However, the concerns about China’s economic slowdown and the abundance of crude supplies took precedence, tempering any potential price spikes.

Notably, some analysts believe that the Biden administration, given the delicate balance of U.S. foreign policy and the impending presidential election, is likely to respond to such attacks in a manner that would seek to minimize the impact on oil prices.

Energy Outlook Advisors’ Anas Alhajji emphasized this delicate equilibrium by stating, β€œBiden cannot retaliate for the attack on the U.S. base on the Jordanian-Syrian border in a way that increases oil prices…anything above $85 Brent is a danger zone in an election year.” He also stressed the widely anticipated stance of the Biden administration, adding, β€œEveryone knows the Biden administration does not want oil prices to increase above current levels.”

At the market close, front-month Nymex crude (CL1:COM) for March delivery declined by 1.6% to $76.78/bbl, following a period in which U.S. crude had scaled to its highest level since mid-November. Similarly, front-month March Brent crude (CO1:COM) fell by 1.4% to $82.40/bbl.

On the stock market front, the S&P 500 Energy Index (XLE) was the only sector among the 11 to record a decline on Monday.

Meanwhile, in Southeast Asia, the real estate crisis deepened as a Hong Kong court ordered the liquidation of China Evergrande, creating a ripple effect, felt globally. β€œThe situation in China is the biggest headwind to the whole market,” noted John Kilduff, a prominent figure at Again Capital. β€œThat’s why the market keeps backing off from the war risk premium.”

Underlying these market dynamics, OPEC+ has begun cautiously implementing its planned new 900K bbl/day oil production cuts. Despite this, analysts have observed that overall shipments have remained relatively stable so far this month. Even with the new cuts, the collective exports from the seven OPEC+ members seem largely unchanged, averaging 15.4M bbl/day in January, according to Kpler estimates.

As overarching economic concerns, particularly in China, take precedence over geopolitical unrest in the Middle East, the crude oil market seems to be navigating a delicate balance between regional conflicts and global demand dynamics.

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