Shutterstock 1908761479

Brent Nears $90 as Geopolitical Risks Threaten Supply

Apr 4 2024

In Wednesday’s oil trading, Brent oil futures closed at $89.35 as supply concerns and increasing geopolitical risk nudged the benchmark ever closer to the significant $90 threshold. Brent has climbed by over 15% since the start of the year, and now stands at its highest level since October last year.

Regional Risks Rise as Attacks Continue

Over the past week, the geopolitical risk associated with oil prices has increased due to events in both the Middle East and conflict between Russia and Ukraine. Beginning with the latter, on Tuesday, April 2nd, a Ukrainian drone strike targeted Russia’s third-largest refinery located in the Tatarstan region. This assault is estimated to have sidelined almost half of the facility's processing capacity, which amounts to 340,000 barrels per day, according to Reuters. This attack is part of a broader strategy by Ukraine to impair Russia's oil revenue, which has already led to attacks on a number of production sites in the country’s energy infrastructure.

Russia concurrently is focused on reducing crude production to align with OPEC+'s lower production targets, as announced last Friday by Russian Deputy Prime Minister Alexander Novak. OPEC+ members met on Wednesday 3rd, with sources confirming that the existing production cuts will remain in place for now as the group continues its attempt to support oil prices through lower production output.

The past week has also seen further developments to the conflict in the Middle East which have increased the risk associated with oil prices. Israel's military strikes on the Iranian embassy in Damascus killed several high-ranking Iranian officials, and subsequent threats of retaliation by Iran have introduced a new layer of uncertainty. A wider escalation of this conflict could significantly impact oil production, given that Iran’s oil exports amounted to $35.8 billion in the year leading up to March 2024. The Iranian missile strike on a US military base in February, which led to US retaliation against Iranian-linked locations in Syria and Iraq, underscores the potential for escalation and further regional instability, all of which contributes to the uncertainty in oil.

Higher Prices Could Cause Headache for Biden Administration

The tightening oil market presents distinct challenges for the United States, particularly in terms of its plan to refill the Strategic Petroleum Reserve (SPR). The Department of Energy has halted its latest procurement for SPR replenishment, driven by the surging oil prices that exceeded the department's budgetary comfort zone. In a bid to conserve fiscal resources while addressing strategic needs, the Department acquired 2.8 million barrels at $81 per barrel last month, as reported by OilPrice, surpassing its preferred price cap of $79 per barrel. The SPR levels remain significantly lower than 2020 benchmarks, following the Biden administration's strategic decision to release over 180 million barrels from the SPR during the summer of 2022 to combat high gasoline prices.

As the US approaches its election season this autumn, the dynamics of gasoline pricing are poised to become a pivotal campaign issue, especially if Brent crude prices persist above the $90 mark. The impending US driving season, spanning from Memorial Day in May to Labor Day in September, traditionally sees a peak in gasoline demand. Elevated prices at the pump during this period could potentially stir voter discontent with the incumbent administration, especially given that crude prices significantly influence retail gasoline prices in the US. Currently, gasoline prices hover around $3.54 a gallon, marking the highest rates since October, with former President Donald Trump already capitalizing on the rising energy costs in his campaign rhetoric.

Brent cot 4th april 2024

Speculators Build Long Positions

The net-long position of speculators on Brent futures has steadily climbed since the start of the year, mirroring and indeed influencing the trajectory of the oil benchmark during that time, as shown in the graph above from ChAI. Looking back to the week ending December 12th, the net-long position stood at around 89,000 contracts but has since ballooned to over 291,000 contracts by the week ending March 26th. Between March 12th and March 26th, the number of speculative short positions only decreased by around 8,000 barrels, whereas long positions grew by more than 55,000. The recent rapid increase in long positions likely stems from trend-following funds entering the market, and indicates an expectation that the current upward momentum may soon push prices above the $90 mark.

Related market insights

Cta protect bg

Commodity coverage

ChAI provides price forecasts and market intelligence for a range of commodities across Metals, Energies, Plastics and Agricultural.

Request List
CTA mockup steel new desigm

Talk to one of our experts about the power of ChAI

Talk to us