Oil gets a boost as rising geopolitical risks offset shale fears

Escalating geopolitical risks in the Middle East are proving to be a boon for oil prices, with speculation over supply disruptions in the energy-rich region countering concerns over rising U.S. crude stockpiles. Futures in New York increased as much as 0.8 percent after jumping 2 percent on Wednesday. Saudi Arabia, the world’s biggest oil exporter, intercepted a ballistic missile fired by pro-Iranian Yemeni rebels over the kingdom’s capital just hours after President Donald Trump warned America is preparing to strike Syria. Meanwhile, investors largely shrugged off a U.S. government report showing a surprise gain in nationwide crude inventories.

A measure of oil price volatility also jumped on Wednesday on speculation rising conflict in the Middle East may hinder crude output and shrink a global glut, sending prices above the highs of January. Meanwhile, concerns remain that surging U.S. crude production will damp efforts by the Organization of Petroleum Exporting Countries and its allies to tighten the market and prop up prices. “Obviously, with what we saw happen in Saudi Arabia’s skies, that’s going to put concerns in the market,” David Lennox, an analyst at Fat Prophets, said by phone from Sydney. “Geopolitics does have a good price kick in it but if it doesn’t escalate and if it’s a one-off event, traders would start reacting to the U.S. data.”

West Texas Intermediate for May delivery was at $67.10 a barrel on the New York Mercantile Exchange, up 28 cents at 12:36 p.m. in Singapore. Prices are headed toward a fourth straight gain for their longest winning streak since February. The contract climbed $1.31 to $66.82 on Wednesday, the highest since December 2014. Total volume traded was about 11 percent above the 100-day average. Brent for June settlement gained 19 cents to $72.25 a barrel on the London-based ICE Futures Europe exchange. The contract rose $1.02 to close at $72.06 on Wednesday.
The global benchmark crude traded at a $5.27 premium to June WTI. Yuan-denominated futures for September delivery were 2.5 percent higher at 428.4 yuan a barrel on the Shanghai International Energy Exchange in morning trading. The contract rose 1 percent to 417.8 yuan on Wednesday.

Geopolitical Tensions

Tensions in the Middle East flared as Saudi Arabia said it intercepted a ballistic missile over Riyadh and shot down two drones in another part of the country on Wednesday in the latest attacks by Yemeni rebels. Just hours earlier, Trump had confirmed the U.S. would strike Syrian President Bashar al-Assad, whose forces are backed by Russia and Iran, over a suspected chemical weapons attack.

“The oil markets are very much linked to geopolitical tensions, especially if they’re in the Middle East, the heart of global oil exports,” said Fatih Birol, executive director of International Energy Agency, said on Bloomberg Television in New Delhi on Thursday. “If tensions continue, they will continue to have an impact on the oil market and prices. Definitely, this will be a reason to push the prices up.”

With investors more concerned about events in the Middle East, the shock gain in U.S. stockpiles did little to tempter prices. Inventories increased 3.3 million barrels last week, according to Energy Information Administration’s data on Wednesday. That compares with a 1.25 million-barrel decrease estimated in a Bloomberg survey before the data.

Sources and photo-credits: Bloomberg with assistance by Tsuyoshi Inajima, and Serene Cheong