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Middle East Tensions and Red Sea Disruptions Fail to Move Oil Prices, China’s Economic Health Holds Key to Future Price Movement

ENERGYMiddle East Tensions and Red Sea Disruptions Fail to Move Oil Prices, China's Economic Health Holds Key to Future Price Movement

Disruptions in sailing on the Red Sea and the Suez Canal and geopolitical tensions in the Middle East are concerning events, but their significant impact on oil prices is not observable – says Piotr Kuczyński, an analyst at Xelion Investment House. He indicates that the greatest unknown and the factor that may translate into an increase in oil prices this year will be the economic situation in China.

“What is happening in the Middle East is very disturbing, but the impact of this situation on oil prices is negligible. This is strange, because we had, for example, an attack by Iran on three countries: Syria, Iraq, and Pakistan, and in addition to this, OPEC+ is reducing production, but prices don’t really want to increase. Of course, this is good news for us, but it is somewhat strange behavior,” says Piotr Kuczyński to the Newseria Biznes agency.

Oil prices are a barometer of geopolitical tensions in the Middle East, where a significant part of this raw material is extracted. The October attack by Hamas on Israel opened a new chapter in the history of this region. In response to these events and the response of the attacked country in the Gaza Strip, oil prices rose by several dollars per barrel. Today, after more than 100 days of conflict, it is at levels several percent lower than at the peak in October, despite many disturbing events that occur in the region almost every day. Pro-Iranian militias operating in Yemen have been attacking trade ships crossing the Red Sea since November 19, causing damage to global trade and oil transport, and in mid-January, Iran shelled targets in Syria, Iraq, and Pakistan, justifying it with attacks on the alleged headquarters of the Mossad and objects associated with the Islamic State.

“There have been disruptions in raw material supplies because the Houthi guerrillas, who essentially rule Yemen, are attacking ships in the Red Sea. These transports often change their route, they sail around the Cape of Good Hope. This extends the route, raises costs, but so far it has not significantly affected prices,” emphasizes the analyst.

The attacks on ships most often take place in the Bab al-Mandab Strait, which connects the Indian Ocean with the Red Sea on the route to the Suez Canal and further to the Mediterranean Sea. This is the fastest route connecting Asia and Europe and one of the busiest shipping routes globally. Resigning from this route means that ships have to choose a much longer route around Africa.

According to estimates of the International Energy Agency (IEA), in the first half of 2023, 8.8 million barrels of oil and finished products were transported daily in both directions through the Bab el-Mandab Strait, which constituted about 12% of sea trade in this raw material. So far, oil tanker crossings along this route have been suspended by companies like BP and Shell.

The IEA has signaled its readiness to act in the event of a potential supply crisis in connection with transport problems through the Red Sea. However, in its opinion, from the supply side, the oil market in 2024 seems to be well supplied.

“What will happen next depends on China [the second-largest oil consumer in the world, after the USA],” says Piotr Kuczyński. “China turned out to be a big surprise in the negative in 2023, and in 2024, no improvement in the situation is seen so far. However, if it were to occur, oil prices would also rise.”

On Thursday, January 25, oil prices recorded a slight increase. As Reuters reports, the reason was a greater than expected decline in US oil stocks last week, as well as the actions of the Chinese central bank, which increased optimism about future stimulus measures and economic recovery.

As reported by BM Reflex, the IEA expects an increase in global consumption of oil by 1.2 million bpd this year and record oil refining in global refineries at the level of 83.3 million bpd, which is 0.8 million bpd more than in the last record year of 2018. Significantly higher are the forecasts of OPEC – the cartel expects an increase in global consumption of oil by 2.25 million bpd this year, and in 2025 – by over 1.8 million bpd. The cartel expects that the demand for oil will continue to grow (although at a much slower pace) until 2045, reaching a level of 116 million bpd, compared to 102.1 million bpd in 2023.

“OPEC and other producers are limiting oil production to keep prices at a reasonable level. I think they will try to do everything possible to keep prices at a similar level as currently,” says Piotr Kuczyński.

Some analysts believe that oil markets have already priced in the impact of disruptions in the Red Sea and the Israeli-Palestinian war, and despite geopolitical tensions, price changes will continue to be limited.

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