Oil prices surge amid Middle East fuel supply concerns

Oil prices rose in early trade on Tuesday, following a more than 1% decline the day before, as increasing geopolitical tensions in the Middle East fueled supply fears.

US data showed that Brent crude futures increased by 17 cents, or 0.21%, to $82.57 a barrel. At $76.95 a barrel, West Texas Intermediate crude had risen by 17 cents, or 0.22%.

Both contracts dropped below $1 on Monday as concerns about demand from China, the world's largest consumer of crude oil, increased due to the worsening real estate crisis and the Hong Kong court's order to liquidate the massive China Evergrande Group.

“Oil price trading above US$80/bbl is pricing in some geopolitical risk premium again as flare-ups continue in the Middle East region. This could fade out within a week or two if there is no strong reaction from the US,” said DBS Bank’s energy sector team lead Suvro Sarkar.

“If it does worsen into a US-Iran standoff and stricter sanctions, then we are looking at $80-100/bbl range for oil to sustain for some time,” he added.

Washington vowed to take “all necessary actions” to defend its troops following a deadly drone attack in Jordan by Iran-backed militants, the first US military deaths since the Israel-Gaza war began, putting markets on edge.

“If US-Iran tensions escalate, particularly through a direct confrontation, the risk rises that Iran’s oil supply is adversely impacted. Iranian’s oil exports are likely the most vulnerable via potentially greater enforcement of sanctions,” said Commonwealth Bank of Australia analyst Vivek Dhar in a note.

Dhar added that Iran exported 1.2-1.6 million barrels per day of crude oil through most of 2023, representing 1-1.5% of the global oil supply.

“How Iran responds to rising US tensions will also dictate the course for oil markets. The key concern is Iran threatening a blockade of the Strait of Hormuz, which sees the transit of 15-20% of global oil supply,” he added.

The gains also come ahead of a Federal Reserve rate decision, as the Federal Open Market Committee (FOMC) starts a two-day meeting on Tuesday.

Policymakers are expected to hold interest rates steady, but some investors believe the US central bank could drop its hiking bias. Lower interest rates are positive for oil prices and could further boost demand.

The CME FedWatch tool showed that markets now expect a 47% chance of a Fed rate cut in March, down from 88% a month earlier.

Meanwhile, a Reuters poll showed that US crude oil and distillates inventories were expected to have fallen last week while gasoline stocks rose.