Oil prices rose sharply at the close of trading, driven by a wave of short-term position-covering by investors ahead of the three-day Martin Luther King Jr. Day holiday in the United States. These price movements come amid cautious anticipation in global markets due to ongoing geopolitical concerns surrounding the possibility of a US military strike against Iran, which could impact the stability of energy supplies in the Middle East.
Market performance and benchmark figures
In numerical terms, Brent crude futures rose 37 cents, or 0.58%, to settle at $64.13 a barrel, posting a weekly gain of 1.2%. Meanwhile, U.S. West Texas Intermediate crude climbed 25 cents, or 0.42%, to close at $59.44 a barrel, registering a weekly increase of 0.5%. These figures reflect the market's heightened sensitivity to any political news that could impact oil flows.
The geopolitical context and its impact on prices
These price increases take on particular significance when viewed within their historical and geopolitical context; the Middle East is a major artery of global oil supplies. Tensions between the United States and Iran have long been a catalyst for price volatility, given Iran's strategic location and proximity to the Strait of Hormuz, through which a significant portion of the world's seaborne oil trade passes. Last week saw both benchmark crude oil prices reach multi-month highs following escalating protests in Iran and hints from US President Donald Trump about the possibility of military strikes.
However, prices fell by more than 4% in last Thursday's session, following Trump's remarks indicating that Tehran's crackdown on protesters was beginning to ease, which helped to dispel immediate fears of a large-scale military conflict that could disastrously disrupt supplies.
Supply forecasts and the Venezuelan factor
On the other hand, economic analysts believe that several factors could limit the continued rise in prices, most notably the expectation of increased oil supply this year. This anticipated increase could cap the geopolitical risk premium that investors typically add to prices during times of crisis.
In a research note, Commerzbank analysts highlighted a crucial point regarding market balance, stating, "If signs of a sustained breakthrough emerge in the Iranian nuclear issue, developments in Venezuela are likely to return to the spotlight." The analysts explained that Venezuelan oil, which has been subject to severe sanctions or recently had its exports blocked, could begin to gradually flow into the global market, undoubtedly impacting the supply and demand equation.
Expected economic impact
The continued volatility in oil prices, driven by geopolitical concerns and ample supply, presents the global economy with mixed challenges. On the one hand, higher prices could increase production and transportation costs globally, putting downward pressure on inflation. On the other hand, stable prices at reasonable levels are vital for both consuming and producing nations to ensure sustained economic growth and avoid sudden financial shocks.
