Oil edged lower as the risk that airstrikes by the US and allies against the Houthis would ignite a wider conflict and disrupt crude flows from the Middle East was balanced by a softer tone in wider markets as traders assess the outlook for monetary policy.
Brent crude traded below $78 a barrel as equities dipped and the dollar gained, making commodities priced in the currency less attractive. Markets are on watch for clues on interest rates ahead of a raft of speeches by policymakers at the World Economic Forum in Davos this week.
The US followed up the initial strikes against targets in Yemen with a fresh attack on a radar installation and also downed a Houthi cruise missile on Sunday.
While the global benchmark was up more than 4% at one point on Friday, it ended the session with a relatively modest gain of 1.1%.
Global oil markets have been transfixed by the situation in the Middle East since the Hamas attack on Israel on Oct. 7.
The strikes on the Houthis were in retaliation for the group’s harrying of ships in the Red Sea over the last couple of months. The Iran-backed militants have vowed not to let up until Israel ends its assault in the Gaza Strip.
The price reaction suggests the market doesn’t, at this point, see a high chance that the evolving conflict will spread and endanger crude production and flows from the wider Middle East, which accounts for around a third of the world’s oil.
Instead, the prospect of rising supply from non-OPEC countries and slowing demand growth are helping to keep prices rangebound.
“It is not our base case that US/UK strikes on Houthi targets in Yemen and issues in the Red Sea will lead to a substantive upside in oil prices over the coming weeks,” Citigroup Inc. analysts including Francesco Martoccia wrote in a note as reported by Bloomberg.
Citigroup also said that “a possible escalation in tensions between Israel and Hezbollah and/or Iran, which the market believes may result in supply disruption, or actually results in supply disruption, is a larger concern in the near-term, though also not within our base case.”
Still, the increased tensions in the Middle East are disrupting crude flows to a certain extent.
Source; Bloomberg
