Oil prices jumped by nearly 1% on Tuesday, lifted by uncertainty over voluntary output cuts by the OPEC+ group of producers and tensions in the Middle East. The Organization of the Petroleum Exporting Countries and its allies, including Russia, cut production by more than expected last week to support oil prices amid concerns that global economic weakness could curb demand growth.
But the move is being complicated by the growing conflict between Israel and Hamas, which has led to Israeli forces launching a ground invasion of the Palestinian enclave. The clash has also stoked fears that it could draw in Iran, a key Hamas supporter and the alleged mastermind of a deadly rocket attack on Israel on Saturday.
Analysts say it is too early to tell about the potential impact on the world economy. However, a prolonged conflict in the region would likely affect travel, investment, trade, and refugee flows, further depressing weak economies. It would also lead to higher inflation and interest rates, which could further depress consumer demand.
Investors have been adding an extra war risk premium to the price of crude oil since Hamas’ attack on Israel on Oct. 7. But “as the risk of a wider regional conflict diminishes, we expect this war-risk premium to disappear and for crude prices to return to their pre-election levels,” ANZ bank wrote in a daily note.
The rise in oil prices is also fueled by some encouraging economic signals in Europe. Germany’s economy grew faster than expected in the fourth quarter, and the European Central Bank is expected to increase interest rates again this year. The euro has been rising against the dollar, boosting the value of its imports from oil-producing nations such as Saudi Arabia and Russia.
The upswing in oil prices has been tempered by worries about the impact of the US-China trade war on global growth and a slowdown in China’s factory activity. But the broader market recovery has been supported by expectations that the world’s largest oil consumer will reduce crude imports imports this year, in line with its pledge to cut consumption by a further 0.5 million barrels per day. OPEC+ is expected to confirm its plan to cut crude output at a meeting on Friday. The move is designed to support the market in light of lower demand forecasts and to keep oil prices above $60 a barrel. It is the first time OPEC has made such a policy adjustment in more than five years. It will take a month or two before market watchers can assess the impact of the cuts. OPEC’s estimates show that the cuts will reduce global crude oil supplies by about 1.2 million barrels per day in 2023. That is a much smaller reduction than the 2.3 million bpd that the group was producing in the fourth quarter of last year. The OPEC+ cut will also take effect when world oil demand is weaker than usual because of slowing economic growth and falling energy demand in Europe and Asia.