Oil prices extended their decline on Tuesday as the geopolitical risk premium on crude eased slightly on hopes for a potential ceasefire in the Israel-Hamas conflict. However, ongoing talks in Cairo remained inconclusive, keeping a lid on a potential price breakout.
Brent crude futures fell 1% to $89.7 per barrel, while U.S. West Texas Intermediate (WTI) dropped 1.3% to $85.29 per barrel. This marks the second consecutive day of declines after a brief rally driven by concerns about the conflict’s impact on oil supplies.
The ongoing negotiations in Cairo involving Palestinian factions, Israeli officials, and U.S. representatives haven’t yielded a breakthrough yet. Hamas rejected Israel’s initial ceasefire proposal, but expressed willingness to consider further revisions.
This ongoing conflict raises the specter of wider regional involvement, particularly from Iran, a major OPEC producer. “Without an end to the conflict,” warned Fiona Cincotta, Senior Financial Market Analyst at City Index, “there’s an elevated risk that other countries could be drawn into the war.”
Iran’s Revolutionary Guard has threatened to close the Strait of Hormuz, a critical chokepoint for global oil transportation. Such a move would significantly disrupt oil supplies and likely trigger a sharp price increase.
While ceasefire talks provide some hope for market stability, underlying supply concerns continue to support oil prices. Mexico’s state oil company, Pemex, announced a further reduction in crude exports to prioritize domestic refineries. This move follows a similar cut in April, highlighting tightening global supply dynamics.
Additionally, OPEC production cuts, reduced fuel exports from Russia due to sanctions, and overall geopolitical instability continue to underpin the geopolitical risk premium on oil.
The future direction of oil prices hinges on the interplay between ceasefire progress and broader geopolitical developments. A successful ceasefire could significantly reduce the geopolitical risk premium on oil, potentially leading to price moderation. However, any escalation in the conflict or further supply disruptions could trigger renewed market jitters and higher prices.
Despite the EIA’s revised forecast for slightly higher U.S. crude oil production and global oil demand growth, near-term market volatility is likely to persist until a clearer picture emerges regarding the Israel-Hamas conflict and its potential impact on oil supplies.
