Oil prices edged higher on Monday as intensifying clashes between Russia and Ukraine over the weekend fueled geopolitical concerns. However, gains were tempered by ongoing worries about weakening fuel demand in China and forecasts suggesting a potential global oil surplus by 2025.
As of 1357 GMT, Brent crude futures rose by 62 cents (0.87%) to $71.66 per barrel, while U.S. West Texas Intermediate (WTI) crude increased by 50 cents (0.75%) to $67.52 per barrel.
The oil market reacted sharply to a significant shift in U.S. policy concerning the Ukraine-Russia conflict. On Sunday, the Biden administration authorized Ukraine to use U.S.-made weapons for strikes within Russian territory. This development, confirmed by two U.S. officials and a source familiar with the decision, signals a dramatic escalation in the conflict.
The Kremlin responded on Monday, labeling the U.S. decision “reckless” and warning it could escalate the risk of a confrontation between Russia and NATO. “Biden allowing Ukraine to strike Russian forces around Kursk with long-range missiles might see a geopolitical bid come back into oil as it is an escalation of tensions there,” said Tony Sycamore, an analyst at IG Markets.
The conflict’s impact on Russian oil exports has been minimal so far. However, Saul Kavonic, an energy analyst at MST Marquee, noted that oil prices could rise significantly if Ukraine targets Russian oil infrastructure in future strikes, Reuters.
In Russia, at least three refineries have reduced operations or halted processing due to high borrowing costs, surging crude prices, and export restrictions, according to industry insiders.
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Despite geopolitical concerns, oil prices faced downward pressure from weak economic data out of China, the world’s second-largest oil consumer. China’s refinery throughput in October dropped 4.6% compared to the same month last year, reflecting subdued demand for refined oil products.
Additionally, factory output growth in China slowed, as reported by government data on Friday, further dampening market sentiment. The economic slowdown in China has raised questions about its ability to sustain strong energy demand, a key factor that has supported oil prices historically.
The International Energy Agency (IEA) recently forecasted that global oil supply could outpace demand by over 1 million barrels per day by 2025, even if OPEC+ producers maintain current output cuts. Such a surplus would exert downward pressure on prices, particularly as major economies continue to face economic uncertainty.
Brent and WTI crude both fell over 3% last week, driven by these concerns and a stronger U.S. dollar, which makes oil more expensive for holders of other currencies.
Investors are also closely watching the U.S. Federal Reserve for guidance on interest rate policy. While recent economic data has lowered expectations for immediate rate cuts, uncertainty remains about the pace and extent of monetary easing. Higher interest rates typically weigh on oil prices by strengthening the dollar and making non-yielding assets like oil less attractive, Reuters.
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The oil market is currently at a crossroads, balancing geopolitical risks with economic uncertainties. While escalating tensions between Russia and Ukraine could provide a short-term boost to prices, long-term trends, such as China’s weakening demand and a potential global oil surplus, may limit gains.
The coming weeks will likely see heightened volatility in oil prices as investors monitor geopolitical developments, central bank decisions, and economic data from major economies. Whether geopolitical risks or demand concerns take precedence will determine the market’s trajectory in the near term.