On a tense Tuesday, oil futures saw a decline, influenced heavily by U.S. monetary policy anticipation and the strengthening dollar.
With the Federal Reserve’s upcoming decision on interest rates amid high inflation, expectations are that high rates could persist. This could bolster the dollar and apply downward pressure on oil prices.
In addition to financial policies, geopolitical tensions in the Middle East also weighed on the markets.
The prospect of ceasefire talks between Israel and Hamas suggested a potential easing of the regional risk premium, which traditionally supports higher oil prices.
However, despite these talks, prices dipped early in the week, as noted by Commerzbank and attributed to the ceasefire discussions involving Israeli and Egyptian officials.
Prices for West Texas Intermediate (WTI) for June delivery fell by 0.85%, closing at $81.93 per barrel on the New York Mercantile Exchange (Nymex).
Similarly, Brent crude for July delivery decreased by 1.00%, ending at $86.33 per barrel. Overall, the month saw a decline in prices by more than 1%.
Geopolitical Tensions and Market Reactions
Israeli PM Netanyahu stated that military actions will continue until all objectives are met, complicating the market. This suggests an ongoing conflict despite potential negotiations.
Market analysts from ANZ noted that even if the U.S. tightens sanctions due to increased geopolitical tensions, the impact might be limited.
Sanctions tend to redirect oil, particularly towards Asian markets, potentially affecting 300–500 thousand barrels per day due to stricter sanctions.
The previous week had shown signs of restricted supply, pushing Brent prices near $90 per barrel.
A significant widening of price spreads in futures highlighted a rising premium for short-term deliveries. This marked the highest since October 2023, barring contract expiry days.
This scenario underscores the complex interplay between geopolitical events and economic policies shaping global oil markets.