Oil prices rise amid geopolitical tensions and rising demand

[WORLD] Oil prices surged by nearly 3% on Tuesday, driven by growing demand in Europe and China, reduced output in the U.S., tensions in the Middle East, and a wave of buying following a sharp drop to a four-year low the previous day.

Brent crude futures rose by $1.92, or 3.2%, to settle at $62.15 a barrel, while U.S. West Texas Intermediate (WTI) crude increased by $1.96, or 3.4%, closing at $59.09. Both benchmarks moved out of technically oversold territory, following their lowest settlements since February 2021 after OPEC+ decided to boost production.

“Market participants may be engaging in some ‘bottom fishing,’ with a notable amount of profit-taking from short positions, which likely contributed to today’s price rebound,” analysts at energy consultancy Ritterbusch and Associates said.

The recent volatility in oil prices has been closely linked to shifts in global economic indicators and geopolitical events. In Europe, economic growth projections have shown signs of stabilization, with companies expected to report a 0.4% increase in first-quarter earnings, according to data from LSEG I/B/E/S. This moderate growth is seen as a positive signal for oil demand, as improved economic conditions typically drive up energy consumption.

OPEC+ (the Organization of the Petroleum Exporting Countries and its allies, including Russia) recently decided to accelerate production hikes for a second consecutive month. Tamas Varga, an analyst at PVM, a brokerage and consulting firm, noted that market participants are now focused on developments in global trade, with the potential for new trade deals.

Varga also pointed to the rising geopolitical risk premium in the Middle East following Israel’s airstrikes on Houthi targets in Yemen, which were in retaliation for an attack on Ben Gurion Airport. Meanwhile, U.S. President Donald Trump announced that the U.S. would halt its airstrikes on the Houthis, following an agreement to stop disrupting key shipping lanes in the region.

Geopolitical tensions in the Middle East have contributed to rising oil prices as market participants factor in the potential for supply disruptions. Any further escalation of conflicts in the region could tighten global oil supplies, pushing prices even higher. The U.S. decision to cease strikes on the Houthis is still being assessed by the market, particularly regarding its long-term impact on regional stability and oil supply routes.

In addition, oil prices received a boost as Chinese consumers ramped up spending during the May Day holiday, and as market participants returned after the five-day break.

The U.S. dollar also dipped to a one-week low against a basket of currencies, as traders grew frustrated over slow progress on trade deals. A weaker dollar makes oil, priced in the U.S. currency, more affordable for buyers using other currencies.

The recent drop in oil prices has prompted some U.S. energy companies, such as Diamondback Energy and Coterra Energy, to announce cuts to their drilling operations. Analysts suggest that reducing output could help push prices higher in the long term.

Ahead of the weekly U.S. oil inventory report, analysts are expecting crude stockpiles to have fallen by around 800,000 barrels last week. If confirmed, it would mark the first back-to-back decline in stockpiles since January. In comparison, stockpiles fell by 1.4 million barrels in the same week last year, with a five-year average decrease of about 100,000 barrels.

Meanwhile, in Europe, companies are expected to report a modest 0.4% increase in first-quarter earnings, as opposed to the 1.7% drop analysts had projected just a week earlier, according to LSEG I/B/E/S data.

The European Union’s trade chief also stated that the bloc is under no pressure to accept an unfair trade deal with the U.S., while the European Commission proposed adding more individuals and over 100 vessels linked to Russia's shadow fleet to its 17th sanctions package in response to Russia’s invasion of Ukraine.

In the U.S., President Trump announced that he would impose new tariffs on pharmaceuticals within two weeks, a move that could affect global financial markets already rattled by previous tariff actions. Treasury Secretary Scott Bessent said the Trump administration might announce trade deals with some of the country’s largest trade partners as soon as this week, though he provided few details.

Meanwhile, the U.S. trade deficit widened to a record high in March as businesses increased imports in anticipation of tariffs. This contributed to a negative GDP growth rate for the first quarter, marking the first time in three years that the economy contracted.

With the Federal Reserve widely expected to keep interest rates unchanged on Wednesday, the potential for interest rate cuts could spur economic growth and boost oil demand, though the ongoing trade tensions and tariffs remain a challenge to the economic outlook.