Brent gains some as supply-demand tensions mount

Front-month ICE Brent has inched $0.13/bbl higher on the day, to $82.47/bbl at 09.00 GMT.

PHOTO: US and Iran flags as chess pieces in a standoff. Getty Images

Upward pressure:

Market watchers are bracing for an escalation in the Middle East crisis and a potential supply disruption in the oil market. Despite the US' repeated assurance that it is "not looking for a war with Iran," the situation remains tense.

Joe Biden told a CNN reporter that he has decided his response to the attacks on US troops in Jordan. Iran's UN representative, Amir Saeid Iravani replied by saying that any attack on the country will be met with a decisive response, Iranian state-run news agency IRNA reports.

“Not only is the market bracing for a response from the Biden administration on the drone attack in Jordan that was executed by an Iranian-backed group, but also if Biden makes good on the threat to reimpose sanctions on Venezuela and the Maduro regime,” Phil Flynn, commodity analyst at The PRICE Futures Group writes. “This, along with the increasing risk from geopolitical events, could cause a quick run for the exits by hedge funds that continue to favor the short side of the market,” he adds.

US crude oil stocks are estimated to drop another 2.5 million bbls in the week ended 26 January, after a massive 9.2-million-bbl decline in the previous week, according to Trading Economics citing American Petroleum Institute (API) estimates.

Downward pressure:

Brent's upside gains remain threatened by China's growing real estate debt crisis. If the situation worsens, it could hinder China's economic growth and harm its oil demand prospects.

Saudi Arabia has directed state-owned Aramco to maintain production capacity at 12 million b/d, which is lower than its planned target of 13 million b/d for 2027. This decision could raise concerns around global demand uncertainty and act as a downward pressure on Brent’s price.

It also remains unclear whether other OPEC producers will follow Saudi Arabia to call off production expansion plans. The UAE has set a target to expand production capacity to 5 million b/d by 2027. Its production capacity was around 4.23 million b/d in December, according to the International Energy Agency.

By Konica Bhatt

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