Thursday, July 18, 2024
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Oil: Falling prices persist into early 2024

Oil continues to fall as concerns over the escalation of the conflict in the Red Sea have eased, which has affected the market.

On Tuesday, January 2nd, Brent crude, the global benchmark, traded close to US$76 per barrel, down 1.5%. Meanwhile, West Texas Intermediate remained above US$70 dollars. This fall in the price of oil is related to the reduction in bets on the scale of interest rate cuts by the main central banks, which led to one of the worst coordinated falls in shares and bonds in the first session of the year.

The change in market sentiment had a negative impact on oil, with market participants closely monitoring developments in the Middle East. Iran’s deployment of a warship in the Red Sea poses a challenge to US forces in the key trade route and could embolden Houthi militants, who have disrupted navigation in the waterway to protest Israel’s invasion of Gaza.

Last year, oil recorded its first annual drop since 2020, due to concerns about rising production outside OPEC+ in relation to the group’s efforts to limit supply amid slowing demand growth. Although events in the Red Sea pose additional risks and increase costs, disruptions in the oil market should not be significant, according to Neil Beveridge, senior analyst at Sanford C. Bernstein.

Beveridge told Bloomberg Television that “there’s really no disruption of physical supply in the market” due to the tensions in the Red Sea. He noted that “the markets look pretty balanced at the beginning of the year, which leaves OPEC with a lot of work to do to keep prices at current levels.”

The Organization of the Petroleum Exporting Countries and its allies will resume regular oil market monitoring meetings with an online session in the first week of February, according to delegates. The group began a new round of production cuts this month, although investors have shown skepticism about the effectiveness of this measure to avoid a global surplus.

On the other hand, China has brought forward the issuance of its oil import quotas for this year, with large allocations given to refineries and private traders that almost equal all the licenses granted for last year. Chinese refiners have been slow to snap up spot cargoes in recent months due to the lack of quotas, and the market is waiting to see if this will kick-start purchases. The current situation in the oil market reflects a delicate balance between supply and demand, with OPEC and its allies facing the challenge of keeping prices stable amid a volatile geopolitical scenario and uncertainties about global demand. Future OPEC meetings and decisions will be crucial in determining the future direction of oil prices.

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