Oil prices saw their first monthly increase since September as tensions escalate between the U.S. and Iran, raising the possibility of a more direct conflict in the Middle East. Both U.S. crude and the global benchmark Brent experienced gains of 5.86% and 6.06% respectively in January. However, prices declined on Wednesday following the news of China’s factory activity contracting for the fourth consecutive month.
“The factory data confirms our view that China, at least for now, is an impediment to global oil demand growth,”
Tamas Varga, an analyst with the crude broker PVM
Despite the impact of Chinese factory activity on the market, prices increased for the month due to stronger-than-expected U.S. growth, disruptions to crude supplies in the U.S. caused by winter storms, and Beijing’s economic stimulus efforts.
Following the winter storms, U.S. crude supply rebounded last week, with inventories climbing by 1.2 million barrels and estimated production reaching up to 13 million barrels per day, as reported by the Energy Information Agency.
Furthermore, the Federal Reserve decided to keep benchmark interest rates unchanged on Wednesday, signaling that it is not yet prepared to initiate rate cuts.
U.S., Iran on the brink
Geopolitical tensions are also simmering in the Middle East with the U.S. and Iran standing on the precipice of a more direct confrontation, highlighting the potential risk to crude supplies in the region.
“The spreading conflict in the Middle East remains the most visible and growing risk for energy markets,”
Natasha Kaneva, head of global commodities research at JPMorgan, told clients in a research note Tuesday 30th Jan.
“While escalation cannot be written off, it remains unlikely in our view, as main parties in the conflict have strong incentives to avoid direct confrontation, and so far they have acted accordingly,”
Kaneva wrote.
Iran-allied militants have killed three U.S. soldiers in a drone strike in Jordan and hit an oil tanker with a missile in the Gulf of Aden in a series of major escalations since Friday.
President Joe Biden has announced his decision on how to respond to the death of U.S. troops, holding Iran responsible for providing weapons to the militants. Defense Secretary Lloyd Austin stated that the administration is committed to taking all necessary actions to protect the United States, its troops, and its interests.
According to U.S. officials who spoke with NBC News on Wednesday, the White House is preparing a “campaign” expected to last several weeks. The specific targets, yet to be confirmed, are anticipated to encompass Iranian assets located outside Iran, across various countries and regions.
Despite Iran denying involvement in the attack that resulted in the deaths of U.S. troops, Tehran has warned of decisive action in response to any U.S. aggression, as reported by the state news agency IRNA.
Although tensions in the Middle East have not significantly impacted crude supplies, the response in oil markets remains subdued. Analysts caution that a direct confrontation between the U.S. and Iran could elevate oil prices if it disrupts the flow of crude through the Strait of Hormuz, a critical chokepoint.
Retired U.S. Navy Admiral James Stavridis, former NATO Supreme Allied Commander, emphasized to CNBC on Tuesday that the death of U.S. troops heightens the risk of a broader conflict, while acknowledging that neither the U.S. nor Iran desires such an escalation.
Reiterating information from earlier, U.S. officials confirmed to NBC News on Wednesday the White House’s plans for a “campaign” spanning multiple weeks, targeting Iranian assets across various locations outside Iran.
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