Oil prices edge higher as investors weigh geopolitical tensions, demand outlook

The gains last week for oil were driven largely by cold weather in North Dakota and other parts of the northern U.S. that resulted in production outages, analysts at Sevens Report Research wrote in a Monday note.

Crude has occasionally popped higher around developments in the Middle East, but has failed to build in a geopolitical risk premium, with WTI trading around $20 a barrel below its 2023 high set in late September.

In a recent note, analysts at J.P. Morgan said that based on their pricing model, there is likely “no geopolitical premium in the oil price today despite the U.S.-led strikes on Yemen’s Houthi rebels, who have been attacking shipping passing through the Red Sea, generating threats of strong response.”

That likely likely reflects that the “global oil impact of shipping disruptions in the Red Sea is likely to be small and easily handled,” they said.

Oil shipping companies can “reroute tankers around the southern tip of Africa to avoid the narrow Bab el-Mandeb strait at the southern end of the Red Sea,” the J.P. Morgan analysts said. Such a major rerouting is expensive and lengthens the voyage by about eight to nine days, “increasing fuel and insurance costs and adding about $2 to the Brent oil price.”

The Gulf Arab states also rely “extensively on overland pipelines,” they said, noting that Saudi Arabia can use its East-West mega pipeline, bypassing the strait to transport crude from its fields in the Persian Gulf to the city of Yanbu on the Red Sea.

See: Oil traders aren’t panicking over Middle East shipping attacks. Here’s why.

Still, risks to global supplies driven by tensions and violence in the Middle East “continue to provide oil support on the dips,” Fawad Razaqzada, market analyst at City Index and FOREX.com, told MarketWatch.

The financial markets are also “in a positive risk sentiment” environment, with three major U.S. indices all breaking to fresh uncharted territories as the tech-fueled rally continues, he said.

The positive risk sentiment from equity markets is “helping to boost the appetite for other risk assets, including crude oil,” said Razaqzada.

The “fear bid” around the Israel-Hamas war has continued to weaken “due to the simple fact that, despite several ships being attacked in the Red Sea in recent weeks, the regional tensions and fighting have not had a meaningful impact on global oil supply up to this point, which was the initial concern,” the Sevens Report analysts wrote.