Geopolitics increased oil prices
Crude oil prices remain volatile, navigating between tightening supply concerns and weakening demand signals. Brent crude has approached $65 per barrel, driven primarily by geopolitical risks rather than underlying supply-demand fundamentals.
The Russia-Ukraine conflict has sharply escalated, heightening the risk premium attached to oil markets. Increasing drone strikes by Ukraine and Russian retaliatory actions have raised concerns over potential disruptions to energy infrastructure, particularly Russian oil exports. This direct threat to oil logistics significantly threatens global oil supplies.
The oil market is facing more pressure from the supply side, mainly because Iran is expected to reject a recent nuclear deal proposed by the U.S. Sources say Iran will likely refuse to stop enriching uranium, meaning it will stay cut off from global oil markets. Due to U.S. sanctions, Iran’s oil exports are limited mostly to China.
At the same time, the growing conflict between Israel and Iran is making things even more uncertain. Recent Israeli airstrikes hit Iranian oil sites, and Iran responded with missile attacks. This back-and-forth caused oil prices to rise sharply, with Brent crude briefly nearing $75 per barrel. The tension also threatens the Strait of Hormuz—a vital oil shipping route that handles up to 20 million barrels a day. If Iran follows through on threats to block the strait, analysts warn prices could shoot up past $100 per barrel.
Wildfires in Alberta, Canada, have also affected the supply side by cutting about 350,000 barrels a day from oil sands production. Although this is small in global terms, it adds to concerns in an already sensitive market.
Adding to the situation, the latest OPEC+ meeting led to a smaller-than-expected production increase—just 411,000 barrels per day in July. Investors reacted by pulling back from bearish bets, causing prices to rise further.
However, on the demand side, the picture is very different. China, a major consumer of oil, has shown weak demand. In April, China’s crude oil imports dropped to a six-month low due to reduced industrial activity and refinery shutdowns. Government economic stimulus hasn’t helped much either, showing that China’s oil demand is still slow.
Looking ahead, oil prices are likely to be driven more by political events than market fundamentals. If tensions between Israel and Iran continue, prices may stay high—around $70 to $80 per barrel. If the conflict gets worse, prices could go even higher.
Still, there are risks on the demand side too. Weak demand from big economies like China could bring prices down over the long term if recovery remains slow.
In summary, the global oil market is walking a fine line. Geopolitical tensions are pushing prices up, even as underlying demand remains weak. Going forward, oil prices will depend heavily on what happens in the Middle East, Russia, and Ukraine—as well as how major economies perform.