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Crude Oil Market: Riding High Amid Geopolitical Turbulence and Surging Global Energy Demand

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Boosted by Geopolitical Risks

Crude oil and gasoline prices rallied on Tuesday, with May WTI crude oil closing at a 5-1/4 month high and RBOB gasoline at a 2-week high. The weaker dollar played a supportive role, while escalating geopolitical tensions in the Middle East fueled concerns over potential disruptions in crude supplies. Moreover, positive global economic indicators spurred optimism about energy demand and further bolstered crude prices.

Geopolitical Unrest Driving the Rally

The ongoing conflict between Israel and Hamas raised apprehensions about potential Iranian involvement, following Iran’s vow to retaliate against an Israeli strike in Syria. Meanwhile, the recent economic reports, surpassing expectations, signaled a robust labor market in the US and resilient manufacturing activities in the Eurozone, reinforcing energy demand projections.

Disruption in Russian Refineries

Recent Ukrainian drone attacks targeting Russian refineries resulted in significant damage to key oil processing facilities, thus curtailing Russia’s fuel export capabilities. JPMorgan Chase’s assessment of a potential offline capacity of 900,000 bpd instilled a $4 risk premium in oil prices. However, the impact on Russian fuel exports remains limited due to the substantial number of Russian vessels already en route.

Tightening Supply and Production Concerns

Expectations of OPEC+ maintaining current production quotas, as they convene this week, supported crude oil prices amid concerns of inadequate supply. Despite the recent rise in OPEC’s crude production levels, Iraq and UAE continue to surpass their production limits, posing a challenge to price stability. Notwithstanding, the surging demand for crude oil in China and the prevailing compliance issues within OPEC+ members have been influential in shaping market dynamics.

Global Disruptions Adding Pressure

Unrest in the Middle East has not been limited to the Israel-Hamas conflict, with the potential spillover of hostilities to Lebanon raising additional alarm bells. Moreover, the intervention of the US and UK in Yemen’s conflict and the disruption caused by Houthi attacks on commercial shipping have added to the uncertainties in global crude oil supply routes.

Market Outlook and Inventories Forecast

The market anticipates a decline in Wednesday’s EIA crude inventories, projecting a draw of -1.0 million bbl. Recent EIA reports indicated levels below historical averages for US crude oil, gasoline, and distillate inventories, hinting at a possible supply crunch. Additionally, the diminishing count of active US oil rigs accentuates the gradual decline in drilling activities over the past year.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.