For much of 2024, oil prices were influenced by rising tensions in the Middle East, particularly between Israel and Iran. However, as the year draws to a close, the intensifying conflict between Russia and Ukraine is now dominating headlines, contributing to increased geopolitical risk premiums in the oil market.
The conflict has taken a new turn with Ukraine’s recent use of long-range missiles, provided by Western allies, to strike Russian territory. Meanwhile, Russia has introduced a new medium-range missile to target the Ukrainian city of Dnipro. In addition to these developments, Russian President Vladimir Putin has lowered the threshold for nuclear weapon use, further heightening concerns in the West.
These events have sent shockwaves through global oil markets, with oil prices poised for sharp fluctuations as tensions rise. The renewed threats of nuclear escalation by Putin have added to the uncertainty, affecting investor sentiment.
Last week, Ukraine launched long-range missiles, supplied by the U.S. and the U.K., into Russian territory. In response, Russia deployed a new missile system to hit Ukrainian targets. Moscow’s actions are also accompanied by increasing nuclear rhetoric, with Putin warning that Russia could use nuclear weapons under certain conditions. This marks a significant shift in Russia’s nuclear policy since its invasion of Ukraine in February 2022.
The geopolitical turmoil of the past week has escalated tensions even further, surpassing those witnessed earlier in the year between Israel and Iran-backed militias, according to Ole Hansen, Head of Commodity Strategy at Saxo Bank. Hansen pointed out that geopolitical risks have driven commodities, including oil and gold, to their best week since April, as investors seek safer assets.
The geopolitical premium has spread across multiple commodities. The U.S. dollar saw its eighth consecutive weekly gain, while gold experienced renewed demand as a safe-haven asset. Meanwhile, oil prices benefitted from the unrest, even though forecasts indicate ample supply and sluggish demand for 2025.
Energy and precious metals led the commodities rally last week, with crude oil—both WTI and Brent—seeing significant gains. Rising refinery margins and expectations of colder weather, which would drive up natural gas prices, also provided support to the oil market.
However, despite the surge in oil prices, the anticipated oversupply of crude oil in 2025 is limiting further gains. The market fundamentals point toward a glut in supply next year, which is capping the potential for a continued “war premium.”
OPEC+ may address these concerns during their meeting on December 1, where speculation suggests they could once again delay the planned increase in oil output, originally set for January. This move could be a response to a market that is already expected to be oversupplied.
Another geopolitical risk factor adding to oil price uncertainty is Iran. Last week, Iran announced it would introduce new advanced centrifuges in response to a resolution from the International Atomic Energy Agency (IAEA), which criticized Tehran for its lack of cooperation on nuclear inspections. This development raises the possibility of tougher sanctions from the U.S., especially with President Donald Trump potentially returning to power and adopting a more aggressive stance toward Iran.
Iran’s reduced oil exports, which are already sold at below-market prices to China, could further tighten global oil supply. Any significant drop in Iranian oil production would likely push oil prices higher in the short term.
However, weaker-than-expected global demand and increasing non-OPEC+ supply remain significant downside risks for oil prices. The growing spare capacity in some OPEC producers also limits the upward potential for crude prices.
As 2024 ends, the combination of geopolitical tensions and market imbalances is expected to lead to heightened volatility in the oil markets, keeping traders and policymakers on edge as they navigate the uncertainties of the global energy landscape.
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