Oil prices stabilized in early trading on Tuesday, following a sharp decline the previous day. Traders are closely monitoring the situation in the Middle East, where there are reports suggesting a potential ceasefire, which has raised hopes of easing geopolitical tensions.
Christopher Tahir, a senior market strategist at Exness, explained in a market report to Rigzone that the earlier selloff was driven by news indicating that the parties involved in the Middle Eastern conflict might reach an agreement. This news helped reduce concerns over possible disruptions to oil supply from the region.
“As fears of supply disruptions ease, the market outlook may turn more bearish,” Tahir noted, adding that volatility could persist if the geopolitical situation shifts again.
Tahir also pointed out that OPEC+ might maintain its current production cuts due to ongoing concerns about weak global oil demand. Traders will likely keep a close watch on the next OPEC+ meeting for any changes to production policies.
Additionally, the strategist warned that U.S. oil production, which has remained near record levels, could contribute to further supply growth in the market.
“With the current global demand-supply imbalance, geopolitical risks, and production increases, the medium-term outlook for oil remains bearish,” Tahir said, emphasizing weaker demand as a key factor.
Meanwhile, Michael Brown, a senior research strategist at Pepperstone, highlighted a “weakness in the commodities space” in a separate analysis sent to Rigzone. Despite a softer U.S. dollar, both gold and crude oil saw notable declines on Monday, with Brent and WTI prices dropping by around 3%. Brown attributed this to an unwinding of the geopolitical risk premium that had been priced into the markets ahead of the weekend.
Antonio Di Giacomo, a senior market analyst at XS.com, also noted a significant drop in WTI crude oil prices on Monday, which fell by more than $2.00, or over 2.5%, closing at about $69.00 per barrel. Di Giacomo explained that the decline was likely driven by reports suggesting a potential ceasefire between Israel and Lebanon, which reduced geopolitical risk concerns.
“Although the rumors of a ceasefire affected the markets, it’s important to note that the conflict did not disrupt oil supply. Therefore, the global supply-demand balance was not significantly altered,” Di Giacomo said.
He emphasized that energy markets are highly sensitive to geopolitical developments. Investors tend to react quickly to news of potential supply disruptions, even when those disruptions do not materialize. In this case, the possibility of a ceasefire lowered the risk premium attached to oil, causing prices to drop.
This pattern of price movements shows how external factors, like geopolitical tensions, can influence energy markets beyond basic supply and demand conditions, Di Giacomo explained.
In contrast, last week’s sharp rebound in WTI prices was driven by concerns over the conflict in Ukraine. These tensions raised fears of supply disruptions, pushing crude oil prices to their highest levels since early November.
“Oil price fluctuations are often driven by investor sentiment and emotional responses to global uncertainty, rather than actual changes in supply and demand,” Di Giacomo said.
He also warned that the recent drop in oil prices could be temporary if international tensions escalate again, underscoring the volatility inherent in commodity markets.
“Given the sensitivity of the oil market to geopolitical risks, crude oil prices are often more a reflection of investor expectations than actual events,” he concluded.
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