SEATTLE (Oil Monster): Brent crude is heading for its steepest weekly percentage decline since 2020 as expectations of a de-escalation in the U.S.-Israeli war with Iran remove part of the geopolitical risk premium from oil, although continued tanker attacks are preventing a deeper selloff.
Brent crude futures for January were up 26 cents, or 0.3%, at $98.55 a barrel by 1346 GMT on Friday, while U.S. West Texas Intermediate crude rose 57 cents, or 0.6%, to $91.09.
Despite Friday's modest rebound, Brent remained on course for a 16% weekly decline, its steepest percentage fall since the beginning of the COVID-19 pandemic and its largest weekly dollar decline in LSEG records dating to 1988.
WTI was set to fall approximately 13% for the week.
Oil prices came under heavy pressure after Democrats gained control of both chambers of the U.S. Congress in the midterm elections.
Markets increasingly interpreted the result as reducing the likelihood of a major new escalation in the U.S.-Israeli conflict with Iran and increasing the possibility of diplomatic progress that could allow more Middle Eastern crude to return to global markets.
Oil prices fell about 8% on Wednesday alone, settling at two-month lows.
This week's selloff reflects a major repricing of geopolitical risk rather than a collapse in physical oil demand alone. Traders are assigning a lower probability to further escalation with Iran at the same time that Gulf exports are recovering and JPMorgan estimates the global oil market has moved back into surplus. But the continued tanker attacks show why the market has not fully removed the Hormuz risk premium.
The sharp decline has been limited by continued attacks on vessels in the Gulf and the Strait of Hormuz.
Britain's UK Maritime Trade Operations has continued reporting attacks on tankers and other vessels in and around the Strait, including incidents involving projectiles striking ships.
Reuters reported that a seafarer was killed in a November 5 explosion aboard an oil-products tanker in the Gulf that was believed to have resulted from a missile attack.
UKMTO data indicate attacks on oil-carrying vessels remain close to record levels.
ANZ senior commodity strategist Daniel Hynes said oil rebounded after traders viewed Wednesday's decline as excessive, but warned that the physical risks surrounding the Strait of Hormuz remain unresolved.
Flows through the waterway remain constrained, and producers continue to rely on alternative pipelines, longer voyages and ship-to-ship transfers to maintain exports.
Also Read: Hormuz Tanker Attacks Threaten Gulf Oil Export Recovery
The geopolitical repricing is occurring as evidence of a looser physical oil market becomes more visible.
JPMorgan estimates the global oil market returned to a surplus of 1.1 million barrels per day in September and that the surplus widened to 1.4 million bpd in October.
Middle Eastern crude price premiums have also moved back toward levels seen before the conflict, reinforcing expectations that supply availability is improving.
Also Read: Global Oil Surplus Widens to 1.4M Bpd as Gulf Exports Recover
The market remains vulnerable to another rapid reversal if attacks intensify or diplomatic efforts fail.
Reuters cited analysts who said the market is loosening toward oversupply but still lacks confirmation of a firm agreement with Iran that would materially reduce regional security risks.
The continued threat to commercial shipping means physical supply conditions could tighten again quickly if Hormuz traffic is disrupted.
The next major test for crude prices is whether Iran-related diplomatic efforts produce a concrete agreement while vessel traffic through the Strait of Hormuz continues recovering.
Traders will also be watching whether the global surplus identified by JPMorgan translates into sustained inventory builds and weaker crude price premiums.
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Courtesy: www.reuters.com
