Oil prices highly volatile amid weak fundamentals and rising tension

Crude oil prices have been on a quite choppy ride during the first week of the year, gripped amid a slew of factors including the growing turmoil in the Red Sea and concerns over supply. Ending 2023 at their lowest since 2020, both benchmarks started the year with increases due to supply disruptions, before slow demand expectations dragged prices down again.

Following the attacks on Sunday, major shipping companies including Maersk and Hapag-Lloyd decided to continue suspending their operations in the Red Sea, which further raised concerns over disruptions to the supply chain. However, this jump happened to be short-lived as the stronger US dollar and rate hike expectations took the driver’s seat to stem some downward corrections by mid-week.

However, on January 3, crude oil prices jumped again and erased all of its decreases from the previous days on the back of the largest oilfield in Libra shutting down. This took approximately 300,000 bbl/day from oil markets, inevitably fueling supply concerns. The ongoing war in the Middle East, which may spill over to the other neighboring countries, was another factor exacerbating the conditions.

On Wednesday, Brent oil settled up by $2.36 at $78.25 while WTI oil was $2.32 higher to settle at $72.70. During the intraday session on Thursday, global oil benchmarks continued to rise with Brent hovering around $78.86, and WTI trading at $73.42.

“This year coming up is a tricky, tricky year,” said Trevor Woods, chief investment officer of commodities fund Northern Trace Capital LLC, as analysts expect demand to exceed supply this year and exert pressure on oil markets. Rising crude production from non-OPEC+ nations particularly the US may not be sufficient to counter deeper output cuts to be applied by the cartel. Global demand, meanwhile, is expected to continue to grow but at a much slower pace.