By Ken Afor
On Tuesday, oil prices slightly declined, continuing a more than 1% drop from the previous session, influenced by concerns about China’s economic outlook.
However, the decline was tempered by apprehensions over supply disruptions due to escalating tensions in the Middle East.
According to Reuters, March Brent crude futures, set to expire on Wednesday, dropped 52 cents (0.6%) to $81.88 a barrel by 1413 GMT. The April contract, more actively traded, also declined by 50 cents (0.6%) to $81.33.
Meanwhile, U.S. West Texas Intermediate (WTI) crude saw a decrease of 29 cents (0.4%), settling at $76.49.
On Monday, both contracts experienced a decline of more than $1, influenced by a deepening real estate crisis in China that heightened concerns about demand in the world’s largest crude consumer. The situation was exacerbated by a Hong Kong court ordering the liquidation of the property company China Evergrande Group.
“(The) ramifications of a possible collapse in China’s property sector makes moot any authority stimulus and will have very negative global shockwaves,” said PVM analyst John Evans.
Despite the challenges stemming from China’s real estate crisis, ongoing conflict in the Middle East served as a mitigating factor, preventing additional losses.
Washington has vowed to take “all necessary actions” following a deadly drone attack in Jordan by Iran-backed militants, marking the first U.S. military deaths since the Israel-Gaza war began, contributed to market apprehension.
“If U.S.-Iran tensions escalate, particularly through a direct confrontation, the risk rises that Iran’s oil supply is adversely impacted,” said Commonwealth Bank of Australia analyst Vivek Dhar. “Iranian oil exports are likely the most vulnerable via potentially greater enforcement of sanctions.”
Iran maintained crude oil exports between 1.2 million and 1.6 million barrels per day (bpd) throughout most of 2023, according to Dhar. This accounted for approximately 1-1.5% of the global oil supply.
JP Morgan mentioned on Tuesday that the geopolitical premium was responsible for the remaining factors influencing the oil market, indicating that beyond the actual supply, geopolitical considerations played a significant role.
“At $82, we estimate Brent is trading today only about $4 above its fair value, with $2 added to account for increased freight costs,” the financial services firm said.
Regarding the supply side, analysts are anticipating insights into production plans from the upcoming meeting of the Organization of the Petroleum Exporting Countries and allies (OPEC+) scheduled meeting for February 1, even though a decision on the group’s oil policy for April might not be reached at that time.
As an indication of the future demand outlook, Saudi Aramco stated that it received a directive from the Saudi energy ministry to keep its maximum sustainable capacity at 12 million barrels per day (bpd) and refrain from further increasing it to 13 million bpd.
“It may be to save money. But most likely it implies that it sees no need for this extra oil in the global market,” said SEB analyst Bjarne Schieldrop.
