Oil prices hold gains on Red Sea supply uncertainty

Brent and WTI hold gains on uncertainty over Red Sea supply routes

Brent crude futures hovered around $78 per barrel on Tuesday, maintaining a 1.8% increase from the prior session. Futures for the U.S. crude benchmark West Texas Intermediate (WTI) also traded close to 1% on the day at $73.53.

This price stability is influenced by growing concerns over potential supply disruptions, primarily driven by heightened attacks on ships in the Red Sea by Houthi militants in Yemen. The situation has prompted major shippers, including industry players such as UK-based oil giant BP and the oil tanker group Frontline, to divert vessels away from the Red Sea. The crisis has expanded to impact energy shipments as well.

In related developments, Iran's Oil Minister, Javad Owji, said on Monday that a cyberattack led by Israel resulted in a nationwide disruption to petrol stations. Meanwhile, U.S. officials announced plans to encourage shippers to disclose more comprehensive information about their engagements with Russian oil, aligning with broader efforts to enforce sanctions.

Oil’s recent advance has reversed last week’s drop, which was fueled by concerns of a global demand slowdown for the commodity.

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Oil price forecast: BMI says energy prices will remain elevated due to geopolitical risks and OPEC+ resolve

In a report sent to the industry website Rigzone earlier this month, analysts at Fitch Solutions firm BMI wrote that oil and gas prices would likely remain elevated into the following year due to geopolitical risks and hardening OPEC+ resolve.

“The outbreak of the Israel-Hamas war and the associated geopolitical risk premia is set to ensure that oil prices remain volatile in the near-term.

This volatility will be further compounded by the ambiguity surrounding near-term OPEC+ quotas, as the group strives to maintain price support amid a weakening macroeconomic backdrop. Fundamentals will be supported by the weakening of non-OPEC supply in 2024 as the U.S. shale sector shows increasing signs of weakness”.

In a separate report released on December 1 and shared with Rigzone, BMI sent through its oil price forecast for the Brent benchmark. According to their forecast, the Brent price is expected to average $84 per barrel in 2023, $85 per barrel in 2024, $84 per barrel in 2025, and $81 per barrel in both 2026 and 2027.

The report also included a Bloomberg consensus, indicating that Brent is forecasted to average $84 per barrel this year, $85 per barrel next year, $83 per barrel in 2025, $79 per barrel in 2026, and $77 per barrel in 2027. In the report, BMI added that upside risks to the Brent price would remain as long as the Israel-Hamas war continues:

“The strength seen in prices last month stemmed from the outbreak of the Israel-Hamas war. While neither Israel nor Gaza produce oil in any significant volumes, there was a risk that, if the conflict were to spread, it would ultimately jeopardize Iranian exports or cargoes transiting the Strait of Hormuz. [...]

To date, the war has remained relatively well-contained and oil market participants seem to be rapidly discounting the probability of a further escalation. [...] As long as fighting continues, the risk of a miscalculation by either side remains acute, posing lingering upside risk to Brent”.

At the time of writing on Tuesday, the price of the continuous contract for U.S. benchmark West Texas Intermediate crude has gained by 3.25% over the past 5 days. Over the past three months, however, it has dropped by close to 18%. The continuous contract for Brent crude slid by 16.7% over the same period, despite its recent jump on risks from the Middle East.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice