Oil prices fall despite ‘grave escalation’ of Middle East crisis. Here’s why.

Meanwhile, attacks on ships in the Red Sea by the Iran-backed Houthi rebel group have prompted ongoing U.S. airstrikes in Yemen, he said. “Iran’s actions risk inviting a more robust U.S. air campaign against its regional assets, highlighting the precariousness of the situation and the potential for further escalation.”

Read: Wall Street fears Red Sea ship attacks will reignite inflation. Check the math.

Biden has said the U.S. “shall respond” to the attack, and “hold all those responsible to account at a time and in a manner (of) our choosing.” Biden met Monday with his national security team to discuss the latest developments regarding the attack.

Biden and oil

But Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors, told MarketWatch that the Biden administration is “most likely to retaliate without affecting the oil markets.”

In a post on X Sunday, he said the Biden administration “cannot retaliate for the attack on the U.S. base on the Jordanian-Syrian border in a way that increases oil prices. Anything above $85 Brent is a danger zone in an election year.”

Everyone knows that the Biden administration does not want oil prices to increase above current levels, he told MarketWatch.

In Monday dealings, global benchmark Brent crude for March delivery
BRN00,
-1.12%

BRNH24,
-1.15%
traded at $82.66 a barrel on ICE Futures Europe, down 89 cents, or 1.1%, after settling Friday at the highest since early November. U.S. benchmark March West Texas Intermediate crude
CL.1,
-1.31%

CLH24,
-1.31%
fell 75 cents, or 1%, to $77.26 a barrel on the New York Mercantile Exchange.

U.S. negotiators, meanwhile, have made progress toward an agreement under which Israel would pause military operations against Hamas in Gaza for two months in return for the release of m ore than 100 hostages captured in the Oct. 7 attack on Israel.

That’s contributed to lower prices for oil, said Michael Hewson, chief market analyst at CMC Markets UK.

China’s economy

Chinese oil demand, “or the lack thereof is still key concern” as well, Hewson told MarketWatch. That helps to explain “why the upside is limited” for oil.

China’s crude imports had fallen to a four-month low of 10.37 million barrels per day in November before rising rose 10% month on month in December to 11.44 million barrels per day, S&P Global Commodity Insights reported, citing data from China’s General Administration of Customs. China is the world’s largest importer of crude oil.

Earlier this month, data from China’s National Bureau of Statistics showed that gross domestic product expanded 5.2% in 2023, finishing the year at one of the lowest levels in decades.

On Monday, in another sign of China’s economic woes, a Hong Kong court ordered property-development giant Evergrande Group to liquidate after railing to reach a restructuring deal with creditors.

China showed a massive increase in oil demand from 2022 to 2023, said Alex Hodes, energy analyst at StoneX, but that was due to the removal of COVID-19 restrictions and “not ‘natural’ growth.”

China has been an “opportunistic buyer in the oil market — filling up inventories when prices were distressed and this has provided a lower limit on where prices can go, along with OPEC cutting production,” he said.

Outlook

For now, U.S. benchmark WTI oil prices are running into technical resistance at the 100-day moving average, which is “likely one of the biggest drivers of the price move lower,” Hodes told MarketWatch.

The 100-day moving average for the March WTI contract was at $77.82 Monday, FactSet data show.

Looking at the bigger picture, Hodes said his outlook for oil this year is a “tale of two halves.”

The first half of the year is likely to see oil markets tighten in “response to the OPEC+ production cuts in place and geopolitical premium in the market,” he said.

In the latter half of the year, it is likely that markets “loosen and prices retrace,” Hodes said, “setting the stage for an overall sideways market on the year.”

Any potential supply disruptions could be “alleviated by OPEC’s large amount of production capacity on the sideline…which could be brought on in a moments notice,” he said, estimating that amount at around 6 million barrels per day. “This should help dampen volatility in supply disruptions.”

—The Associated Press contributed.