Even though geopolitical shocks have a way of upsetting financial markets, Ukraine’s surprise attack, which has been called “Russia’s Pearl Harbor,” caught the oil industry off guard and caused an unanticipated spike in crude prices that some analysts predict will be short-lived.
The weekend that OPEC+ announced its decision to accelerate its output rise for the third consecutive month coincided with the price increase. According to the Wall Street Journal, several analysts had predicted that oil would decline following that ruling, but that was before Ukraine’s drone raids on Russian air force sites damaged or destroyed Russian bombers needed for missile attacks and perhaps nuclear strikes.
The recent drone attacks by Ukraine on Russian air bases have “introduced a renewed element of supply risk into the [oil] market,” according to a newsletter published on Monday by StoneX’s director of energy-market strategy, Alex Hodes. This geopolitical context served as “an offset” to the announcement that OPEC+ would increase output by 411,000 barrels per day in July—”a move widely anticipated and already priced in by traders.”
The announcement, which was announced on Saturday by eight nations in the organization made up of the Organization of the Petroleum Exporting Countries and its allies, expedited the restoration of 2.2 million barrels of voluntary production curbs that had been put in place in January 2024. Since April, they had been slowly bringing those barrels of oil back to the world market.
According to strategists at Société Générale, the accelerated output increases express “aggravation” against persistent overproduction by members of the group who have not fully complied with output quotas, meaning that by July, OPEC+ will have returned to the market 1.37 million barrels per day of the 2.2 million barrels per day of voluntary cuts.
According to the analysts, Société Générale predicts that the additional supply rise will cause the Brent curve to shift into a complete one-month to 12-month contango in six months, assuming a continuous but more gradual return of barrels beginning in August.
This can indicate that there is more supply than is required to meet demand when oil futures prices are higher than the current spot pricing.
Bulls versus bears
“Today’s market move puts focus back on fundamentals rather than sentiment,” Velandera Energy Partners managing director Manish Raj stated. “Bears had been in control for too long.”
Oil prices have decreased this year due to expectations of increased supply on the worldwide market and uncertainties about the future of oil consumption.
Hodes claimed that the fact that short positions in Brent were at their biggest level since October, prior to the OPEC+ decision, indicated that the market had already factored in the move’s negative effects. He claimed that this, along with growing geopolitical tensions, made it possible for the oil market to rise sharply on Monday.
Nevertheless, Raj told MarketWatch that Velandera Energy “does not see a sustained rally here, barring any news in supply constraint.” “Oil bulls once bitten are twice shy, so bosses are asking traders to wait and watch before putting money to work.”
“Marking up their inventory rather than deploying new capital into crude,” Raj continued, adding that there is probably a “relief rally” happening.
The July contract for U.S. benchmark West Texas Intermediate crude (CL.1) (CLN25) was up $1.80, or 3%, at $62.59 a barrel on the New York Mercantile Exchange, marking a significant increase in oil prices on Monday. On ICE Futures Europe, the new front-month August contract for global benchmark Brent oil (BRNQ25) (BRN00) was trading at $64.59, up $1.81, or 2.9%. On Friday, both had reached their lowest points in around three weeks.
“Oil is trading as if it has just remembered that geopolitics exists,” SPI Asset Management managing partner Stephen Innes wrote in a paper on Sunday.
A number of pro-Moscow bloggers and Russian media have highlighted the gravity of the situation, calling the most recent attack on Ukraine “Russia’s Pearl Harbor,” according to news sources.
It’s ‘all geopolitical crisis arbitrage, which tends not to have lengthy legs.’ The SPI Asset Management’s Stephen Innes
Innes remarked, “It’s a balancing act between barrels and bombs, where the smallest misstep could trigger a bigger flight to long hedging,” in reference to events in Russia and Ukraine.
“All geopolitical crisis arbitrage, which tends not to have long legs,” he continued, is what this is.
After rising as much as 5.1% from Friday’s settlement, WTI and Brent crude were both below the session’s peak levels on Monday afternoon.
Strategic Energy & Economic Research president Michael Lynch described the geopolitical premium on the upside for prices as “minimal.”
The Houthi danger to the region’s oil transportation routes “seems much diminished,” he told MarketWatch, while peace in the Middle East is still a long way off. “More sanctions are Russia are possible, but so far they have had minimal impact on their exports, which is likely to continue.”
The prospect of a nuclear deal with Iran poses a greater risk of lowering oil prices, which “would mean a little more oil, and some increase in bearish sentiment,” Lynch added.
The “growing economic uncertainty, which is probably going to affect demand later on,” perhaps in the third quarter, is even more concerning, he continued. For the remainder of the year, “the momentum should be bearish” for oil due to “a probable increase in Saudi production.”
