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Oil prices eased on Tuesday after gaining nearly 6 per cent a day earlier, but analysts warn the market remains vulnerable and any flare-up in the Strait of Hormuz could push crude above the critical $120 a barrel threshold.
Brent, the benchmark for two thirds of the world's oil, was trading 2.10 per cent lower at $112.04 a barrel at 4.20pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down more than 3.22 per cent at $102.44 per barrel.
The pullback followed reports indicating that the US may be easing Iran’s blockade of the strait, raising hopes of renewed supply from the Middle East.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said the flare-up on Monday, with US and Iranian forces exchanging fire in the narrow waterway, has injected significant volatility into the market.
“Renewed tensions and damages to key oil infrastructure will keep the upside pressures tight,” she told The National. While a surge above key resistance is possible, “I don’t see a sustainable rise above the $120 per barrel level”, she added.
“The $115-$120 range is acting as a strong resistance. Above this level, the narrative shifts from supply constraints to demand destruction,” Ms Ozkardeskaya said, highlighting rising inflation expectations, tighter monetary policy and higher yields as limiting factors.
Giovanni Staunovo, strategist at UBS, however, said the path for crude prices remains skewed to the upside as long as flows through the strait are limited. "The direction for price is dependent on how many barrels for how long are disrupted via the strait", he told The National.
“For now, flows via the strait remain restricted, further increasing the number of barrels not produced,” he said, adding that recent attacks on shipping didn't help the situation.
A fragile US-Iran ceasefire appeared to be holding on Tuesday morning, despite the previous day of clashes in the Strait of Hormuz and missile and drone attacks targeting the UAE. The UAE Foreign Ministry accused Iran of a “terrorist attack” on Monday, when Tehran launched a drone attack on a vessel affiliated with the Abu Dhabi National Oil Company while it crossed the Strait of Hormuz.
At least 13 vessels were forced to reroute and move away from the areas Iran has claimed in its control zone in the strait, meaning tension has risen sharply.
“The oil price bias remains bullish,” said Vijay Valecha, chief investment officer at Century Financial. He also warned reopening the vital route is unlikely to be smooth: “This won’t be a clean, linear path.”
However, some analysts argue the scale of the supply shock may be less severe than initially anticipated. Economists at Julius Baer are of the view that while oil storage levels are declining due to disrupted energy flows, the pace remains manageable.
“The oil market deficit is closer to 5 per cent than to 10 per cent,” due to the “rerouting of oil exports via the Red Sea and the Gulf of Oman”, said David A Meier, economist, and Norbert Rucker, head of economics and next-generation research, at Julius Baer.
“Crude oil and oil product prices are below the 2022 crisis peaks, which suggests concerns about the biggest fuel shock in history and an imminent crisis are not shared by markets,” they said.
The gas market, in particular, remains surprisingly immune, they added.
The biggest risk for the global oil market is the “re-emergence of energy infrastructure” as a target, said Mr Valecha.
“Global stockpiles of oil and products are being drawn down at a pace because of the Iran war, with the biggest risks seen in naphtha, jet fuel and LPG [liquefied petroleum gas],” he said.
