Geopolitical risk supports oil prices after two-day decline

Crude oil prices on Wednesday ended a two-day losing streak that extended into today's session in Asian morning trade, supported by growing concerns about the state of international relations in the Middle East.

After falling below $80 a barrel earlier in the week, Brent oil prices recovered to above $80 today, while West Texas Intermediate was above $77 a barrel. At the time of writing, the international benchmark was around $80 a barrel.

The increase, while shaky, is nonetheless notable, coming amid a host of bearish factors. The EIA surprised yesterday with a rise in crude oil inventories for the week ending August 9, but also reported a decline in fuel inventories, suggesting healthy demand.

China reported lower refinery production, lower apparent oil demand and lower crude imports for July – all indicators that reinforce the impression that the world's largest oil importer is no longer as thirsty for the commodity as it once was.

“The data doesn't look good,” said Warren Patterson, head of commodity strategy at ING, according to Bloomberg. “It only reinforces demand concerns that have been simmering in the market for some time, and with China expected to account for nearly 60% of global demand growth this year, those concerns are unlikely to go away anytime soon.”

At the same time, however, prices also received support from renewed hopes of a rate cut in the US before the end of the year. This hope arose after the release of consumer price inflation data, which showed a slight increase in prices in July.

However, the biggest positive factor for oil prices remains geopolitics in the Middle East. Fears of a major war in the region grew last week after Iran announced retaliation against Israel for the assassination of the Hamas leader in Tehran. Since then, however, Iran has been waiting for the right moment and keeping everyone on tenterhooks.

“Geopolitical risk continues to hang over the oil market. It is still unclear how and if Iran will retaliate against Israel following the assassination of the Hamas political leader on Iranian soil. This uncertainty has led to increased options trading activity as market participants seek to protect themselves against significant price increases,” Patterson and Ewa Manthey of ING said in a note today.

By Irina Slav for Oilprice.com

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