Oil prices rally amid Middle East risks and financial market gains

Oil prices continued to rise for the third consecutive day, buoyed by positive trends in broader financial markets and ongoing geopolitical tensions in the Middle East. Brent crude approached $80 per barrel, marking a 2.4% increase over the previous three sessions and setting futures on course for their longest winning streak since September. West Texas Intermediate surpassed $74 per barrel. The rally in global stocks is contributing to the demand for riskier assets like oil, despite the Federal Reserve’s cautious stance on potential interest rate adjustments.

In the Middle East, Houthi militants persist in launching missiles at vessels near the coast of Yemen, leading to costly diversions for many tankers. Additionally, the US conducted an airstrike in Iraq, targeting the commander of an Iran-backed militia in response to the deaths of three soldiers.

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Since the beginning of the year, oil prices have largely remained within a narrow range. Support has been provided by ongoing tensions in the Middle East and production cuts by the OPEC+ coalition, led by Saudi Arabia and Russia. However, this has been counteracted by robust production and record exports from the US, alongside slowing global demand growth.

Priyanka Sachdeva, senior market analyst at brokerage Phillip Nova Pte, noted that despite bearish indicators, the oil market continues to focus on the prospect of a ‘soft landing’ and insufficient supplies in the latter part of the year.

Market spreads in the crude oil sector still indicate short-term strength globally, with the gap between Brent’s two nearest contracts maintaining a bullish, backwardated structure. Conversely, WTI’s prompt spread reflects a contango pattern, signaling looser conditions with an 8-cent barrel difference.

In Asia, the outlook for the largest importer, China, remains challenging. Consumer prices in January experienced their sharpest decline since 2009, as the nation grapples with deflationary pressures. Producer prices have also remained in deflation for 16 consecutive months.