Oil Market Stability: Weak Physical Demand Counters Middle East Tensions

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Oil Market Stability: Weak Physical Demand Counters Middle East Tensions

On Tuesday, oil prices stabilized amidst a blend of factors, including concerns over persistent U.S. inflation, developments in the Middle East, and fluctuations in physical oil markets.

Escalating tensions in the Middle East, particularly the Israeli military’s intensified attacks in southern Gaza amid ongoing ceasefire negotiations, initially drove fears of supply disruptions. However, these concerns were offset by weakness in the physical oil market and apprehensions surrounding U.S. inflation trends.

Brent crude futures dipped 30 cents to $83.03 a barrel, while U.S. West Texas Intermediate (WTI) crude futures declined 25 cents to $78.23 a barrel by 1330 GMT.

Tamas Varga from oil broker PVM highlighted the challenges in reaching a ceasefire agreement and the potential impact on shipping routes, such as the closure of the Suez Canal. These factors contribute to market uncertainty, although genuine weakness in physical oil markets also significantly dampens optimism.

The narrowing spread between the first-month Brent contract and the six-month contract suggests diminishing concerns about supply tightness, indicating a well-supplied market environment. Ole Hansen from Saxo Bank noted that geopolitical tensions have become less effective as drivers for oil price increases, with the market’s attention shifting towards supply dynamics and economic indicators.

Last week, both Brent and WTI crude experienced their sharpest weekly declines in three months, influenced by weaker-than-expected U.S. jobs data and speculation regarding the timing of Federal Reserve interest rate adjustments. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, suggested that stagnant inflation levels could imply less restrictive monetary policy than previously assumed.

The strength of the U.S. dollar also weighed on oil prices, making crude more expensive for traders holding other currencies. Additionally, market participants await the latest U.S. inventory reports, which are anticipated to show a decline in crude and product stockpiles, potentially offering further insights into supply dynamics.

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