Oil logs back-to-back gain as Middle East conflict keeps supply risk ‘elevated’

Still, upside price gains may be “capped down the road due to rapidly falling expectations around aggressive Fed rate cuts and growing concerns over China’s economy,” he told MarketWatch.

Traders continued to assess the potential threat to oil supplies after a series of weekend strikes led by the U.S. against Iran-backed paramilitaries and groups, in retaliation for a drone strike last month that killed three U.S. troops. The strikes also hit Iran-backed Houthi militants in Yemen, who vowed to strike back.

Disruptions to oil production due to the war between Israel and Hamas have “so far been limited, but renewed attacks on U.S. bases in Syria on Monday point to ongoing risks of an escalation, which will likely trigger volatility in oil prices ahead,” analysts at UBS wrote in a Tuesday note.

U.S. Secretary of State Antony Blinken returned to the Middle East this week, meeting Monday with Saudi Arabia’s crown prince as he attempted to foster progress toward a ceasefire between Israel and Hamas. Signs of progress toward a ceasefire agreement — one that would also see the release of Israeli hostages held by Hamas — contributed to last week’s rout in crude prices.

Beyond the uncertainty in Gaza, “tensions in the Middle East persist following the U.S. commitment to protect its troops, especially after a lethal drone strike in Jordan,” which “intensifies regional instability,” said Antonio Ernesto Di Giacomo, market analyst for Latin America at XS.com, in market commentary.

The UBS analysts, meanwhile, noted that estimates showed crude production by the Organization of the Petroleum Exporting Countries down by 410,000 barrels a day in January, the biggest monthly fall since July.

The decline was attributed to voluntary OPEC+ production cuts, as well as the temporary shut-in of Libya’s largest oil field. Meanwhile, U.S. crude output likely fell by around 300,000 barrels a day last month due to cold weather, they said.

“So, we continue to advise investors with a high risk tolerance to sell Brent’s downside price risks, or to add exposure to longer-dated Brent oil contracts,” the UBS analysts wrote. “Against the current uncertain backdrop, oil and energy stocks can also be utilized to insulate portfolios from market risks.”

Over in the U.S., the Energy Information Administration’s monthly Short-term Energy Outlook report on Tuesday revealed a rise in January natural-gas consumption to a record high, driven by severe U.S. winter weather.

Read: U.S. natural-gas consumption hit a record in January. So why are prices falling?

The government agency on Wednesday will release its weekly petroleum-supply data. On average, analysts polled by S&P Global Commodity Insights expect the data to show a climb of 600,000 barrels in commercial, domestic crude supplies for the week ended Feb. 2. They also forecast an inventory rise of 300,000 barrels for gasoline, and a decline of 2.4 million barrels in distillate stockpiles.