The Impact of Geopolitical Risk and Weak Demand on Oil Prices

The Impact of Geopolitical Risk and Weak Demand on Oil Prices

The ongoing hostilities in the Middle East region and the Red Sea shipping route have introduced a potential “floor” in oil prices due to the increasing risk of supply disruptions. However, the demand side has remained weak as China’s top policymakers have signaled a less forceful approach in enacting stimulus measures. This article analyzes the conflicting fundamental factors impacting the oil market and explores potential price movements for West Texas Oil (WTI crude).

One of the factors supporting oil prices is the rising geopolitical risk premium in the Middle East region. The ongoing hostilities in the Red Sea shipping route, particularly by Yemen’s Houthi militants, pose a threat to oil supplies. Despite recent counter strikes from the US and UK, the Houthi militants continue to target registered ships, primarily those from Israel and its allies. Additionally, Iran has increased its military involvement in the ongoing war between Israel and Hamas, further contributing to the geopolitical tensions. These geopolitical uncertainties have heightened the potential for supply disruptions and subsequently supported oil prices.

While geopolitical risks have provided some support to oil prices, the demand side narrative remains weak. China’s central bank, the People’s Bank of China (PBoC), has disappointed market participants by keeping its 1-year medium-term lending (MLF) rate unchanged since August 2023. This decision indicates that Chinese policymakers are not rushing to enact more pronounced stimulus measures to combat deflationary risks in the economy. The lack of substantial stimulus dampens short-term bullish sentiment in the oil market and weighs on demand expectations.

In terms of technical analysis, West Texas Oil (WTI crude) experienced a steep drop of -15% from 30 November 2023 to 13 December 2023. However, the price managed to stall at the medium-term ascending trendline support, which has been in place since the 20 March 2023 swing low. Additionally, WTI crude formed a “higher low” in the past four weeks, suggesting a potential minor bottoming formation. The key resistance for this formation lies at the US$76.05/78.40 range, aligning with the 50-day and 200-day moving averages acting as price caps. Consequently, WTI crude is expected to trade sideways between US$78.40 and US$69.20 in the short to medium term, considering the conflicting fundamental factors at play. A clearance above the resistance range may trigger a more significant upwards movement, with medium-term resistances at US$83.20 and US$93.80. Conversely, a failure to hold at US$69.20 would lead to a retest of the first major support zone at US$67.55/66.35.

The current state of the oil market is characterized by conflicting fundamental factors. Geopolitical risks, particularly in the Middle East and the Red Sea shipping route, have introduced a potential floor in oil prices due to the increasing likelihood of supply disruptions. However, weak demand, exemplified by China’s cautious approach to stimulus measures, hinders short-term bullish sentiment in the market. As a result, West Texas Oil (WTI crude) is expected to trade sideways in the near term. A breakthrough of the resistance range could signal a more significant upwards movement, while a failure to maintain support may trigger a slide towards lower price levels. The market will closely monitor geopolitical developments and demand indicators to assess the future trajectory of oil prices.

Technical Analysis

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