Tuesday has multiple events that could profoundly affect crude prices. The moves could be even larger than normal, given thin trading in the market, as the world’s largest importer, China, is on holiday. Depending on what happens over the next couple of days, some analysts are forecasting that crude prices could drop by as much as $10 per barrel.
WTI prices are up as much as 9% since the start of the year, even including a slight pullback in recent days. Brent has had similar moves as markets react to the geopolitical situation. Following the US capture of Maduro at the start of the year, the initial market reaction was downward, as investors priced in the possibility of new Venezuelan crude entering the market. But then US President Donald Trump’s attention swung to the protests in Iran, and the potential for regime change, causing WTI to rise $10 per barrel in less than a month. Since the start of February, however, the price has somewhat stabilised as the US and Iran were expected to hold talks on the nuclear issue.
Tensions and Talks on Iran, Russia and Ukraine
Representatives from Tehran and Washington are holding indirect talks in Geneva on Tuesday, hoping to reach an agreement to prevent an escalation of tensions. The US has been building up its military presence in the Middle East, with two aircraft carriers reportedly near the region. Meanwhile, on Monday, Iran started military drills in the Strait of Hormuz, which carries around a fifth of the world’s oil supply. Reportedly, Trump said he supported Israel launching military strikes on Iran’s ballistic missile sites. The tensions have kept crude prices elevated even as talks continue, heightening the risk of a price drop if there is progress towards a nuclear deal.
Also in Switzerland, representatives of Russia and Ukraine are meeting to try to work out a peace deal. This comes after Ukraine began developing plans for a spring referendum on a potential agreement with Russia and for presidential elections, the latter a major concern for the US, which is brokering the talks. The news suggests that at least Kyiv is optimistic about finding an agreement, although markets apparently remain unconvinced and have yet to price in the effects of a deal that would end the war in Ukraine. The assumption is that any deal to end the fighting would include Russia being allowed to reenter the formal oil market.
High Prices and OPEC Production Increase
The tensions have pushed crude prices higher, prompting analysts to speculate that OPEC will increase production ahead of the peak summer demand season. That could mean raising quotas as soon as the March meeting. Reports circulated late on Monday that OPEC officials were considering raising output at the next meeting, which would come into effect in April.
Analysts at Citi forecast that Brent will remain in the $65-70 range in the coming months if the situation in Iran isn’t resolved and no peace deal is reached in Ukraine. That could be the catalyst for OPEC+ putting more supply on the market. Meaning that if a deal is reached, OPEC could continue to restrict oil production as the price drops. Though that could depend on the overall impact of the deal. Those same analysts at Citi expect Brent to drop $5-10 if the tensions in Iran are resolved and Russia and Ukraine reach a peace deal. Further upside might be limited, as it would likely prompt OPEC to increase production.
