Oil prices experienced a 1% increase on Friday, driven by escalating tensions in the Middle East, which raised concerns about potential supply disruptions from the region. However, the market is on track for a weekly loss due to expectations of fewer U.S. interest rate cuts throughout the year.
The possibility of retaliatory action from Iran following an attack on its embassy in Damascus by suspected Israeli warplanes has supported oil prices near a six-month high, despite counteracting factors such as the surge in U.S. inventories.
Ole Hansen from Saxo Bank noted that geopolitical events during the weekend have historically lifted the risk premium, only to recede on Monday, as seen since December. Brent crude futures rose by $1.10 to $90.84 a barrel, while U.S. West Texas Intermediate crude futures increased by $1.15 to $86.17, both heading for a marginal weekly loss of less than 1%.
Although the International Energy Agency (IEA) reduced its 2024 world oil demand growth forecast to 1.2 million barrels per day, OPEC’s more optimistic view on Thursday, suggesting a growth rate 1 million bpd higher, provided some support to prices. The market currently aligns more with OPEC’s forecast, as opposed to the IEA’s revised projection.
Amidst these developments, U.S. officials expect a potential Iranian attack on Israel, but one that would not escalate to the extent of drawing the U.S. into war. Conversely, Iranian sources indicated Tehran’s intention to respond in a manner that avoids significant escalation.
Analysts at ING expressed their anticipation for a potential retreat in oil prices unless there is further escalation in the Middle East or supply disruptions. They maintained their forecast for Brent to average $87 a barrel over the second quarter of this year.
Friday’s gains offset the losses from the previous session, which was dominated by persistent U.S. inflation, dampening hopes for an imminent interest rate cut as early as June. Federal Reserve officials signaled that there was no urgency to reduce interest rates, citing ongoing U.S. inflation.