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Oil prices fell on Wednesday and continued lower on Thursday as NATO confirmed Russia did not fire missiles at Poland.
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The reduction in geopolitical tensions moved traders to focus on economic woes and the potential of Covid spikes in China during flu season.
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There is still plenty of upside in oil markets as the EU embargo on Russian oil looms and a shortage of heating oil ahead of winter.
Oil prices declined on Wednesday and were still lower early on Thursday morning as NATO made clear that the missile that fell in a Polish village did not come from Russia.
West Texas Intermediate settled at its lowest level in about three weeks on Wednesday, MarketWatch reported.
The military organization and the Polish authorities said that the missile was likely fired by the Ukrainian forces in response to Russian missile attacks.
Oil prices jumped on the initial reports of the incident, in which two people lost their lives, as initial reactions from politicians suggested a further escalation between the West and Russia.
Later, as the facts began to emerge, the comments changed and the tension was effectively defused, pushing prices lower.
“Crude oil fell after NATO cleared Russia’s missile attack on Poland, while demand concerns (are) back to trader’s focus amid ongoing China’s Covid curbs and gloomy global economic outlooks,” CMC Markets analyst Tina Teng told Reuters.
The U.S. reaction to reports of missiles falling on Poland drew some rare praise from Russia, with Kremlin spokesman Dmitry Peskov welcoming the “measured” and “professional” response.
A further headwind for oil prices is the beginning flu season, which could complicate the pandemic situation in China, according to some observers.
“With Covid cases in China continuing to rise, especially as we move towards flu season, traders are left with little option to recalibrate positions reflecting the possibility of more lockdowns in heavily populated centers that hurt oil demand exponentially more than other areas of the economy,” said Stephen Innes from SPI Asset Management.
The headwinds appeared strong enough to offset a sizeable decline in U.S. crude oil inventories, at some 5.4 million barrels for the week ending November 11. Initially, after the EIA reported the figures yesterday, prices inched up only to decline later and close lower than they opened.
There is still upside potential going forward, however. For starters, there is the upcoming EU embargo on Russian crude, which also features sanctions on third-party buyers that do not comply with it.
There is also the diesel shortage problem, particularly pronounced in Europe and parts of the U.S., which is seen as contributing to higher oil prices.
“With the severe shortage of heating oil here on the east coast and the situation continuing to evolve in Poland/Ukraine, we feel energy markets will be driven by headlines with volatility to remain quite elevated,” Tariq Zahir, managing partner at Tyche Capital Advisors, told MarketWatch. “We do feel the risk is to the upside in the short to medium term.” NB: Charles Kennedy wrote this article for Oilprice.com
