Oil posts second weekly gain as geopolitics takes centre stage

Futures are at a six-month high as traders weigh the possibility of Iranian retaliation

An excavator clears rubble after an Israeli strike on an Iranian embassy annex in Damascus, Syria. Reuters

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Oil prices rose on Friday and posted a second weekly gain amid geopolitical tensions and concerns over tightening supplies in the market.

Brent, the benchmark for two thirds of the world’s oil, settled 0.57 per cent higher at $91.17 a barrel. West Texas Intermediate, the gauge that tracks US crude, rose 0.37 per cent to settle at $86.91 a barrel.

Both Brent and WTI reached their highest levels since October this week due to traders' concerns about potential retaliation from Tehran following an attack on its embassy by Israel.

On Monday, an Israeli air strike hit an Iranian embassy annex in the Syrian capital, Damascus, killing high-ranking Iranian military personnel.

“So far, tensions in the Middle East didn’t impact oil supply significantly. As a result, we saw a sustainable rise in oil prices not a spike,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank

However, Iran’s potential direct involvement could mark a new milestone in the Middle East conflict, backing a rapid rise in oil prices in the near term, she said.

“In that context, we can’t rule out the risk of a short-term rally in oil prices to $95-$100 a barrel range.”

Crude prices have also been supported by Russian refinery disruptions following Ukrainian attacks.

On Tuesday, a Ukrainian drone struck Russian oil company Tatneft’s Taneco refinery, which has a processing capacity of more than 17 million tonnes.

“Geopolitical supply risks are re-emerging, robust demand is continuing, Opec+ production cuts are extending, and April has historically brought a rally ahead of the expected summer driving seasonal demand,” said Ehsan Khoman, head of commodities, ESG and emerging markets at MUFG.

Opec+ made no policy changes following an online meeting on Wednesday, implying that voluntary output cuts of 2.2 million barrels per day would remain in place until the end of June.

The group reiterated the need for countries that are producing above their quotas to scale back and compensate for the excess output.

Opec+ also said it would continue to “closely assess” market conditions and that member countries were ready to take additional measures if required.

MUFG expects the producer alliance to effectively control the market to keep the price of Brent crude within a range of $80 to $100 per barrel this year.

“A key risk from oil’s advance… is the potential it has to add to inflationary pressures. It’s a development which may accentuate bond market vulnerabilities to apprehensions about sticky inflation,” Mr Khoman said.

“Indeed, US exceptionalism is a concern for policymakers to be sure their effort to contain cost pressures have achieved success,” he added.

This week, Federal Reserve Chairman Jerome Powell said that the US central bank had time to consider when to begin cutting interest rates.

“Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy,” he said during an address at Stanford University's Graduate School of Business.

The Fed has planned three interest rate cuts this year amid signs of easing inflation in the world’s largest economy.

"The latest spike in oil prices will be reflected in the upcoming inflation reads and may derail the Fed from its ‘three rate cuts’ plan for this year. Indeed, when we listen to the Fed speakers, we sense that there is an increasing caution regarding that expectation," Ms Ozkardeskaya said.