Oil prices made a turnaround on Tuesday, aiming to recoup the previous session’s losses amidst escalating tensions in the Middle East following a weekend drone attack that claimed the lives of three U.S. troops in Jordan.

Rising Tensions in the Middle East

Worrisome developments in the Middle East have injected volatility into the oil market. Experts have expressed cautious optimism that the main parties involved will see the value of avoiding direct confrontation and work to de-escalate the situation.

The fallout from drone attacks on Russian refiners, however, remains an underappreciated yet potentially more impactful threat to global oil product balances, according to insights from J.P. Morgan analysts.

Market jitters were further fueled as the top two crude benchmarks suffered a decrease of over $1/bbl on Monday, triggered by concerns over energy demand amid China’s deepening real estate crisis.

However, despite lingering concerns over demand, the fundamentals from a supply risk perspective continue to paint a bullish picture, as pointed out by Price Futures analyst Phil Flynn.

Rebounding Prices

Front-month WTI crude (CL1:COM) for March delivery wrapped up the session +1.4% higher at $77.82/bbl, while March Brent crude (CO1:COM) closed +0.6% at $82.87/bbl.

The rebound in oil prices has brought a sigh of relief to investors and industry stakeholders. Exchange-traded funds (ETFs), including (NYSEARCA:USO), (BNO), (UCO), (SCO), (USL), (DBO), (DRIP), (GUSH), (NRGU), and (USOI), are expected to reflect the renewed optimism in the oil market.

Possible Reimposition of Venezuela Sanctions

The U.S. has initiated the process of reimposing sanctions on Venezuela following governmental actions that have compromised the country’s political landscape. Amid the Maduro government’s move to block the leading opposition candidate from participating in the upcoming presidential election, the U.S. has taken concrete steps to reinstate sanctions.

Previously, the U.S. had relieved sanctions in October under specific conditions, but the recent events have prompted the Treasury Department to set a deadline of February 13 for American entities to terminate transactions with Venezuelan state-owned miner Minerven. Furthermore, the State Department has indicated that a broader sanctions relief for Venezuela’s oil and gas sector will not be renewed after April 18 unless there is a change in direction by the Maduro administration.

Global Implications of Saudi Arabia’s Decision

In parallel, Saudi Aramco has been directed by the Saudi energy ministry to maintain its maximum sustainable capacity at 12M bbl/day, retracting from its earlier plans to elevate production to 13M bbl/day. This decision raises questions about OPEC’s earlier expectations of oil fundamentals and is seen by DNB Markets analysts as a signal of a possible shift in Saudi Arabia’s outlook on the future oil market balance.