Geopolitical Tensions No Match For Oversupply Despite Modest Oil Price Uptick

But Occidental argues that the world faces an impending crude shortage: File Image/Pixabay

Oil on Monday achieved modest gains due to familiar geopolitical worries – but one analyst noted that a "profound" influence on market equilibrium almost guarantees that bearish sentiment will continue to govern crude trading throughout 2024.

Brent settled up 66 cents at $77.99 per barrel and West Texas Intermediate settled up 50 cents at $72.78, after it was disclosed that a drone that killed three U.S. soldiers in Jordan was made in Iran; traders also reacted to Qatar denying reports of a breakthrough in ceasefire negotiations between Israel and Hamas.

ING analysts stated in a note that "Hopes of a ceasefire between Israel and Hamas drove some of this [oil pirce] weakness; however, for now, a ceasefire does not appear imminent."

This came on the heels of reports that drones from Ukraine hit a Russian oil refinery over the weekend; this was the latest in a series of attacks that have reduced Russia's exports of the petrochemical feedstock naphtha.

Monday's crude gains were said to be capped by growth this month in the U.S. services sector, which pundits noted reduced the likelihood of interest rate cuts and increased the U.S. dollar to its highest level in almost three months; indeed, Federal Reserve chair Jerome Powell said consumers may have to wait beyond March until the central bank assesses whether inflation is retreating in a "sustainable way."

Meanwhile, Gaurav Sharma, energy analyst and regular contributor to Forbes, emphasized that bearish sentiment prevails despite geopolitical and other risks, largely because the market remains in oversupply: "The U.S. shot up the charts to become the world's largest crude oil producer in 2023 pumping above 13 million bpd; its non-OPEC peers Brazil, Canada, Guyana and Norway are also seeing record production upticks.

"These additional barrels, higher inventories, and China and India's continual purchase of Russian oil despite Western sanctions, have all had a profound supply-side impact on market equilibrium."

But while agreeing with Sharma's view that the market at present is oversupplied, Vicki Hollub, CEO of Occidental, told media on Monday that the oil market will face a supply shortage by the end of 2025 partly because about 97 percent of the oil produced today was discovered in the 20th century and less than 50 percent of the crude produced over the last decade has been replaced.

She said, "The market is out of balance right now, but again, this is a short-term demand issue; but it's going to be a long-term supply issue."