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Crude oil closed higher Tuesday to recoup the previous session’s losses, with rising tensions in the Middle East as traders await the U.S. response to the weekend drone attack that killed three U.S. troops in Jordan.
While escalation in the Middle East “cannot be written off, it remains unlikely in our view, as main parties in the conflict have strong incentives to avoid direct confrontation, and so far they have acted accordingly,” J.P. Morgan analysts wrote.
“Drone attacks on refiners in Russia pose a new, less appreciated, but potentially more damaging threat to global oil product balances,” the bank said.
The top two crude benchmarks both fell by more than $1/bbl on Monday as China’s deepening real estate crisis sparked concerns over energy demand.
Those concerns remain, but “the fundamentals, from a supply risk standpoint, are still very bullish,” Price Futures analyst Phil Flynn said.
Front-month WTI crude (CL1:COM) for March delivery ended +1.4% to $77.82/bbl, and March Brent crude (CO1:COM) closed +0.6% to $82.87/bbl.
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On the supply side, the U.S. has begun reimposing sanctions on Venezuela after the Maduro government blocked the leading opposition candidate from the country’s presidential election later this year.
The U.S., which first imposed oil sanctions on Venezuela in 2019, had granted sanctions relief in October as part of a deal that included releasing political prisoners and setting conditions for a fair presidential election.
The Treasury Department gave U.S. entities until February 13 to wind down transactions with Venezuelan state-owned miner Minerven, and the State Department said the U.S. would not renew a wider sanctions relief for Venezuela’s oil and gas sector when it expires on April 18 unless Maduro changes course.
Also, Saudi Aramco said it was ordered by the Saudi energy ministry to maintain its maximum sustainable capacity at 12M bbl/day, after it said in November that the multi-billion dollar project to raise production to 13M bbl/day was progressing well.
The decision could signal that oil fundamentals are weaker than OPEC had expected, DNB Markets analyst Helge Andre Martinsen said, perhaps serving “as a signal that Saudi has moderated its view of the future oil market balance… that Saudi has realized that the increased capacity is not needed to serve the oil market in medium term.”