Global energy markets witnessed a significant decline at the close of trading yesterday (Friday), with oil prices falling by more than 2.5%, influenced by a combination of intertwined economic and geopolitical factors. This drop comes as investors assess the supply and demand outlook in the market, amidst diplomatic moves that could reshape the conflict in Eastern Europe and renewed tensions in Latin America.
Closing details and weekly losses
Brent crude futures for February delivery fell 2.57%, losing about $1.60 to settle at $60.64 a barrel. This resulted in a slight weekly loss of 0.28% for the benchmark. Meanwhile, West Texas Intermediate (WTI) crude futures for February delivery declined 2.76%, losing $1.61 to settle at $56.74 a barrel.
The impact of a strong dollar and a geopolitical risk premium
Oil prices came under strong selling pressure due to the strengthening of the US dollar against other major currencies. It is a well-established economic principle that there is an inverse relationship between the dollar and commodities; a stronger dollar makes oil more expensive for investors holding other currencies, thus putting downward pressure on demand and prices.
Furthermore, geopolitical developments played a pivotal role in calming market anxieties and reducing the "risk premium" on prices. Investors cautiously awaited the outcome of the meeting between Ukrainian President Volodymyr Zelensky and his US counterpart Donald Trump in Florida, which focused on ways to end the ongoing war with Russia. Markets view any signs of de-escalation or peace negotiations as a positive indicator of stable Russian supplies, thus mitigating concerns about global supply shortages.
US-Venezuelan tensions: Economic, not military, pressure
Meanwhile, on the other side of the world, tensions between Washington and Caracas escalated. The United States ordered its forces stationed in the Caribbean to focus on blockading Venezuelan oil tankers for at least two months. Although this measure aims to severely restrict Venezuelan oil exports, markets interpreted the move as a sign that Washington is inclined to use economic tools and a naval blockade rather than direct military intervention, which mitigated market panic.
Oil markets remain in a state of constant fluctuation as a result of these conflicting factors, between hopes for de-escalation in Europe, tightening sanctions in South America, and the effects of monetary policies and the strength of the dollar on the global economy.
