Oil Market Update: Supply Concerns Outweigh Middle East Tensions

December 12th brought a mixed bag of events impacting prices. Despite escalating tensions in the Middle East following an attack on a commercial chemical tanker by the Iran-aligned Houthis, concerns over excess supply and slowing demand growth managed to overshadow the geopolitical risks. Let's delve into the key developments shaping the oil market on this crucial day.

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Middle East Tensions:

The attack by Houthi forces in Yemen, resulting in a cruise missile striking a chemical tanker, caused a temporary spike in oil prices. However, the market quickly reversed course as it grappled with broader concerns of surplus supply and weakening demand. While the incident heightened safety risks in vital shipping lanes, the immediate market response showcased the complex dynamics influencing oil prices.

Current Price Movements:

Brent crude futures for February retreated 0.4%, slipping 32 cents to settle at $75.71 per barrel by 1105 GMT. Simultaneously, U.S. West Texas Intermediate crude futures for January delivery declined 0.3%, losing 19 cents to reach $71.13 per barrel. These fluctuations reflect the delicate balance between geopolitical tensions and broader market fundamentals.

Global Oil Demand Outlook:

The outlook for global oil demand in 2024 remains uncertain, with OPEC and the International Energy Agency (IEA) providing conflicting assessments. The recent OPEC+ deal aimed at limiting supply did little to assuage market concerns, as evidenced by the tepid response to the news. Both OPEC and the IEA updated their forecasts this week, adding an additional layer of uncertainty to an already complex market environment.

Upcoming Events:

Investors are approaching the market with caution ahead of a crucial U.S. inflation report and interest rate decision. The release of the Consumer Price Index (CPI) report on Tuesday, coupled with the Federal Open Markets Committee's policy meeting ending on Wednesday, has the potential to significantly impact oil prices. ABCAP USA analysts suggest that the U.S. CPI data could set the tone for policymakers in their upcoming decisions. Additionally, the ongoing COP28 climate summit has garnered attention, with negotiators awaiting a new draft deal. The previous version faced criticism for its perceived weakness, particularly the omission of a clear "phase-out" plan for fossil fuels. Any developments from the summit could influence long-term expectations for the oil market.

Lastly, market participants are eagerly anticipating the latest U.S. inventory reports, projecting a 1.5 million-barrel drop in crude stocks. The American Petroleum Institute is set to release its initial report at 2130 GMT, providing further insights into the supply-demand dynamics within the U.S. market.

As oil markets navigate the complex web of geopolitical tensions, supply dynamics, and global economic factors, today's update underscores the challenges in predicting short-term price movements. While Middle East tensions remain a concern, the overriding factors of excess supply and demand uncertainties continue to shape the oil market's trajectory.