Crude oil has started Monday on a slow note following a highly volatile last couple of weeks when losses of more than 7% were recouped from one week to the next.
The main driver of volatility remains the Israel-Hamas conflict. Hopes over a ceasefire had calmed the market last week. However, as it appears now that such an agreement may not materialize in the short term, oil prices may well continue to rise.
Meanwhile, the charts of crude oil suggest prices may have formed a long-term low and that more gains could be on the way this week, despite Monday’s weaker start.
So, crude oil prices continue to display a heightened sensitivity to developments in the Middle East, overshadowing nearly all other factors.
While there remains a slim possibility of a ceasefire, the situation is tense, which should keep oil prices highly volatile and vulnerable to headline risk.
That said, the extent to which a risk premium should be applied to the Middle East situation remains uncertain, as oil supplies have yet to be significantly impacted by the crisis.
Minor disruptions such as rerouting ships around the African continent, could arguably increase costs.
Consequently, even in the event of a ceasefire, I estimate the downside risk for oil to be limited to approximately 5-7%.
Meanwhile, on the demand side of the equation, we are seeing mixed global signals, with the US economy showing resilience while other regions struggle to keep pace.
The spotlight is particularly on China as a significant cause for worry, though concerns in the Eurozone also contribute to the uncertainty.
However, due to Chinese markets being closed for Lunar New Year celebrations, assessing demand from the largest importer of oil and second-largest consumer will beRead more on investing.com