Oil prices dropped significantly in recent days, but the downward trend was paused on Tuesday (6 August) by tensions in the Middle East.
The price of both brent crude futures and West Texas Intermediate (WTI) fell by more than 3% on Friday (2 August). The decline continued on Monday, with Brent and WTI trading down 0.86% and 1.03% at $76.15 and $72.76 per barrel, respectively.
The recent hit on oil prices follows four straight weeks of decline, with concerns about a potential recession in the US causing a mass sell-off as well as low Chinese demand.
Analysts have argued that without cuts to US interest rates, economic growth in the country will suffer and impact demand for oil and gas.
However, on Tuesday prices appeared to rebound, with brent crude increasing by 0.2% to $76.48 per barrel and WTI growing 0.4% to $73.20.
The halt in decline was a result of rising tensions in the Middle East.
Supply concerns after the recent Israeli attack on Iran, followed by Iran's vow to retaliate, have prevented the continued mass sell-off of oil, with companies instead withholding supply.
A cut in production at Libya's Sharara oilfield has also contributed to supply concerns.
Priyanka Sachdeva, a senior market analyst at Phillip Nova in Singapore, told Reuters: "Oil seems to have clawed back some of its losses as broader concerns of a possible escalation in Middle Eastern conflict continue to add (to) apprehensions in (the) oil market. The possibility of an all-out war in (the) Middle East is getting real, threatening global supplies."
“In times of crises all assets correlate… but geopolitical tensions in the Middle East and OPEC’s ongoing production cuts are providing a floor for crude prices,” Matt Smith, lead oil analyst for the Americas at Kpler, told CNBC.
These recent developments highlight the vulnerability and volatility of the current market. Oil prices were on the brink of collapse if it weren’t for tensions in the Middle East shifting demand globally.
While conflict in the Middle East appears to be keeping oil prices from spiralling, it can only serve as minor counterbalance to a decrease in oil prices with supplies expected to increase later this year. However, geopolitical risks cannot be a long-term solution for balancing oil prices.
