Crude Prices Snap 7-Week Losing Streak Fueled By Red Sea Tensions; Analysts Hope For Rebound

Crude prices have surged after recording their first weekly gain since late October. The catalyst behind the rise is the suspension of transit through the Red Sea by major shipping lines, underscoring the vulnerability of this crucial artery for international crude trade.

Global benchmark Brent surpassed the $77 per barrel mark, marking a 0.9% increase last week and breaking a seven-week streak of declines. West Texas Intermediate hovered near $72, signalling a potential shift in market sentiment. The situation unfolded as the Suez Canal Authority in Egypt closely monitored tensions in the Red Sea, following the US announcement of shooting down 14 drones launched from Iran-backed Houthi-controlled areas of Yemen.

Over the weekend, shipping giants MSC Mediterranean Shipping Co. and CMA CGM SA declared their vessels would avoid the Red Sea, responding to escalating threats. Maersk Tankers A/S also joined the fray, stating it would ensure its vessels have the option to steer clear of the troubled route. The rising aggression from Houthi militants, particularly targeting ships associated with Israel in response to the Gaza conflict, has heightened concerns about the security of the Red Sea as a vital maritime passage.

The recent surge in oil prices comes amid a backdrop of challenges for the crude market. Oil had experienced a 20% drop from its peak in late September and is down 10% for the year. Factors contributing to this decline include the outperformance of US shale supply against analyst expectations and scepticism regarding the commitment of all OPEC+ members to production cuts.

Hedge funds have become the least bullish since 2011, reflecting a cautious outlook. However, Wall Street analysts foresee the potential for a rebound in prices in the coming year. Goldman Sachs Group Inc., historically bullish on oil, adjusted its forecast for Brent in 2024, lowering the range by $10 to $70-$90 per barrel in a report dated December 17. The bank cited increased US supply as a key factor influencing their revised projections. Goldman's average price forecasts for the next year stand at $81 for the global benchmark and $77 for WTI.

Analysts at Goldman, including Daan Struyven, emphasized the impact of stronger-than-expected production outside of OPEC as a defining trend for 2023. They pointed to recent US supply data strengthening this trend, outlining factors such as low spot prices relative to inventories, depressed positioning, and favourable financial conditions as supporting their view that demand will grow solidly in 2024.

However, concerns persist as timespreads continue to signal weakness. Both Brent and WTI find themselves in a bearish contango, where later contracts trade at premiums to prompt ones, until the middle of the next year. Brent's six-month spread recently stood at 21 cents a barrel in contango, contrasting to the $1 a barrel in the opposite, bullish backwardated structure observed a month ago.

As geopolitical tensions in the Red Sea escalate, the oil market is experiencing a notable shift. The suspension of transit through this crucial waterway serves as a reminder of the intricate connection between global events and commodity prices.

*Inputs from Bloomberg*