- The oil price rises significantly as airstrikes from the US and its allies on Houthi rebels have deepened supply disruption concerns.
- The likelihood of a retaliation from Iran-backed Houthis is high, which could widespread conflicts in Middle East.
- Investors are optimistic about interest rate cuts by the Fed in March.
West Texas Intermediate (WTI), futures on NYMEX, has climbed strongly to near $74.50 as investors worry about deepening oil supply concerns due to mounting tensions for merchant vessels through Red Sea. The US military has launched multiples airstrikes on Iran-backed Houthi group in retaliation for attacking commercial shipments of oil.
The airstrikes from the US military and its allies are expected to disrupt trade flows through Suez Canal and will also escalate Middle East tensions. A widespread conflict in the Middle East will elevate oil supply disruptions this 2024 and will keep prices of WTI higher.
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The upside risks to oil prices have elevated amid a likelihood of oil supply disruption in times when the global economy is recovering from pessimism of restrictive interest rate environment and high price pressures.
Meanwhile, investors’ confidence towards a rate cut by the Federal Reserve (Fed) in March despite higher consumer price inflation has provided some strength to the oil price. A sharp recovery in the global economy is highly anticipated if the Fed plans an early rate cut as predicted by market participants. This will also spurt the global oil demand and eventually its prices.
Going forward, investors will focus on China’s Q4 Gross Domestic Product (GDP) and Industrial Production data for further action. The Chinese economy has been struggling for a firm-footing due to lower export orders and vulnerable domestic demand post Covid. It is worth noting that China is the leading importer of oil in the world and an economic slowdown in the Asian giant impacts the oil price.