Volatility persisted in the oil market on Tuesday as uncertainties in the Middle East continue to keep traders on their toes.
Oil prices surged more than 2%, while Brent was trading above $76 per barrel as China cut key lending rates, raising optimism over the country’s oil demand.
Moreover, the ever-changing situation in the Middle East has also kept the market on its toes as prices experience wild swings.
“This has been the rhetoric and driving force over the past few weeks and not much has changed,” said Zain Vawda, market analyst at OANDA.
Both crude benchmarks extend Monday’s gains
At the time of writing, the West Texas Intermediate crude oil was trading 2.5% higher at $71.80 per barrel.
The price of Brent crude was at $76.02 per barrel, up 2.3% from the previous close.
Prices had fallen 7% last week due to concerns over poor demand from China, the world’s largest importer of crude.
Additionally, reports claimed that Israel may avoid targeting oil facilities in Iran, which eased concerns over supply from the region, dragging down prices.
However, the ongoing conflict in the region has once again caught the attention of the market.
Geopolitical uncertainties fuel volatility
On Tuesday, US Secretary of State Antony Blinken arrived in Israel, the first stop on the Middle East tour, to revive talks to end the war in Gaza.
“Tensions in the Middle East continue to be reflected in the Brent options market,” Warren Patterson, head of commodities strategy at ING Group, said in a note.
The volatility skew shows that calls are becoming increasingly more expensive than puts as participants buy protection in the event of a price spike, given the uncertain geopolitical environment.
China remains key for oil market
Even as uncertainties increase in the geopolitical context in the Middle East, experts believe China’s economic activities may have a long-lasting impact on oil.
OANDA’s Vawda said:
Every data release from China or potential ceasefire discussions in the Middle East are resulting in swings in oil prices.
The China situation may have more long lasting impact though as an economic slowdown in China means one for the rest of the world.
Meanwhile, the International Monetary Fund revised down its growth estimate for the global economy slightly to 3.2% for 2024 and 2025.
The IMF said growth outlook is largely unchanged and remains at its weakest level in decades.
The agency also cut its forecast for growth in China’s economy for 2025 to 4.8% from 5.0% earlier.
This raises concerns about whether the Asian giant would recover completely next year, thereby also casting shadows on oil demand growth.
“The oil market in China is a concern. This is evident from China’s implied oil demand, which is calculated by subtracting net exports of oil products from the amount of crude oil processed,” Vawda further said.
Meanwhile, investors will be eyeing the release of the weekly crude oil inventory data from the US.
The private data will be released by the American Petroleum Institute, and the US Energy Information Administration will be releasing its official report later this week.
A fall in crude oil stockpiles in the world’s largest producer of oil, the US, could further support oil prices.
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