Ukraine, Middle East Hostilities Boost Oil, Market Weakness Possibly Ending

Analysts believe a bull market could re-emerge later this year: File Image/Pixabay

Even though they were widely thought to have been baked into oil trading activities, geopolitical tensions were cited as a contributing factor to crude extending its gains on Tuesday, settling over 1 percent higher.

After a drone strike from Ukraine caused a large fire in a fuel tank at an oil terminal in Russia's southern port of Azov, Brent settled up $1.08, or 1.3 percent, at $85.33 per barrel, while West Texas Intermediate settled up $1.24, or 1.5 percent, at $81.57 per barrel.

Traders also responded to comments from Israeli foreign minister Israel Katz, who warned of an impending decision on an all-out war with Hezbollah despite the U.S. trying to avert such a confrontation.

Phil Flynn, senior market analyst at Price Futures Group Inc., said, "Everywhere you look the geopolitical risk factor is very high…..we have not seen a major impact on supply but that could change really quickly."

The other major factor motivating traders in 2024 – the hope that central banks would finally lower their interest rates – came into play on Tuesday and capped gains, when New York Federal Reserve president John Williams said interest rates will come down gradually over time, and Boston Federal Reserve president Susan Collins warned against reading too much into recent data showing that inflation is cooling.

Still, Aldo Spanjer, a senior commodities strategist at BNP Paribas, said, "I'm comfortable being bullish for Q3 still.

"While June looks weak, I think demand comes up for diesel, gasoline and particularly jet; that's a pretty strong demand increase over the next two to three months."

Bloomberg noted that "Key timespreads have leaped in recent sessions, a sign that some of the market's recent weakness could be turning."

Even the mixed economic signals from China in the previous session were downplayed to an extent on Tuesday, with Tamas Varga, an analyst with PVM, writing in a note, "It is axiomatic that if China is infected with an economic virus, the whole [world] would feel the repercussions; yesterday was the exception that proved the rule."

Michael Kern, analyst at Safehaven.com, concluded that "Macroeconomics are starting to feel better, and should the U.S. Fed comments this week persuade the market that things will get better soon, the strength in oil could be maintained for longer."