Oil prices near $90 as Middle East tensions rise

Oil prices jumped on Friday nearing the $90 mark as tensions escalated in the Middle East and sparked concerns that oil supply could be disrupted.

The benchmark contracts surged more than $3 before easing slightly.

In the morning trade, Brent futures were up $1.40, or 1.61 per cent, at $88.51 a barrel.

The most active US West Texas Intermediate contract climbed $1.38, or 1.68 per cent, to $83.48 per barrel reported Reuters.

Geopolitical tensions play on oil supply lines

“Rising geopolitical risk premiums translate to a risk-off environment at this juncture with a heightened risk of oil supply disruption at least in the short-term,” said Kelvin Wong, an analyst at OANDA in Singapore in a Reuters report.

“Further escalation [suggests] that the tit-for-tat retaliation between both sides will drag for longer,” said Jun Rong Yeap, a market strategist at IG in Singapore.

“Prices of oil could stay supported in the meantime as tensions will continue to heat up,” Yeap said.

Analyst outlook for oil price

Investors have been closely monitoring Israel’s reaction to the April 13 tensions.

The geopolitical risk premium in oil prices had been unwinding this week on the perception that the US could ensure tensions were managed and de-escalated through dialogue and international pressure.

Looking at the long-term impact of the Middle East conflict, Simon Williams, chief economist, HSBC CEEMEA (Central and Eastern Europe, the Middle East and Africa) noted in his latest research notes on Middle East oil economies, that they are extremely bullish on the Middle East, especially the GCC. He said, “We still see a Gulf region well placed to outperform its developed and emerging market peers.”

“That view partly reflects the pace at which we expect the region’s non-oil economy is continuing to expand. But it is more about the rising quality of growth we see as economic reforms and broad improvements in policy making get traction.”

Despite the geopolitical tensions in the region which have now gone on for seven months, the strength of the economies of the UAE and Saudi Arabia have contributed to “a limited impact on macro performance and market sentiment”, explains Williams.

He added, “Low debt and high savings also provide policy flexibility and a buffer against economic shock, though at the moment we see little in the region’s overall balances to be a cause of concern.

“This includes the outlook for public finances and the region’s external accounts, which remain strong, and inflation, which we see trending lower.”

He cautions and highlights, the reduction in growth momentum, with an increasing reliance on oil in the region. Williams said, “Cyclically, momentum is fading in some parts of the region, and oil reliance is on the rise where spending is rising quicker than taxes and imports are outpacing gains in non-oil exports,” which could again lead to oil price fluctuation due to supply-side considerations.

In global crude oil supply, Venezuela lost a key US licence allowing the OPEC member to export oil to markets globally.

The US also announced sanctions on Iran, another OPEC member.

Read: Flydubai cancels flights to Tehran

With contributions from Reuters.