- Last week commodities had their best week since April, pushed up by rising geopolitical tensions and adverse weather.
- Crude oil prices booked a weekly gain last week, “supported by rising refinery margins for distillate products amid an incoming cold snap driving US natural gas prices to a one-year high.
- Despite weak fundamentals, oil prices could be boosted by geopolitics at the end of this year and early next year.
For most of this year, the geopolitical premium in oil prices was coming from the Middle East flare-ups amid the Israel-Iran escalation. At the end of 2024, the other major conflict, between Russia and Ukraine, is grabbing headlines with an escalation of hostilities, Ukraine’s first use of long-range missiles provided by Western powers for strikes within Russia, a new missile type Moscow is using to hit Ukraine, and Putin’s new nuclear doctrine.
The end of this year is set to see wild swings in oil prices amid rising geopolitical tensions in the Russia-Ukraine war and the renewed saber-rattling from Vladimir Putin about the potential use of nuclear weapons.
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Last week, Ukraine fired long-range missiles supplied by the United States and the UK into Russian territory. Russia, for its part, deployed a new type of medium-range missile to strike the Ukrainian city of Dnipro.
Russia also lowered its threshold of scenarios in which it could use nuclear weapons, in yet another warning from Moscow to the West since the invasion of Ukraine in February 2022.
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The last week alone in the Ukraine war developments raised geopolitical tensions beyond levels seen during the year-long conflict between Israel and Iran-backed militants, according to Ole Hansen, Head of Commodity Strategy at Saxo Bank.
Overall, last week commodities had their best week since April, pushed up by rising geopolitical tensions and adverse weather, Hansen wrote in a weekly commentary.
Related: U.S. Drilling Activity Slips Further As Market Volatility Remains
The Russia vs. Ukraine/West escalation raised the geopolitical premium in all commodities. The U.S. dollar “responded with its eighth weekly gain, while gold saw fresh haven demand, injecting momentum back into the market after an early November correction. Crude oil also benefited, despite forecasts for ample supply and sluggish demand through 2025,” Hansen said.
Overall commodities gains last week were led by energy and precious metals, including WTI and Brent crude, the heavyweights in the Bloomberg Commodity Index tracking 24 major futures markets, the strategist noted.
Crude oil prices booked a weekly gain last week, “supported by rising refinery margins for distillate products amid an incoming cold snap driving US natural gas prices to a one-year high, heightened Russia–Ukraine tensions, and doubts about OPEC+ unwinding voluntary production cuts in 2025 due to market oversupply,” Hansen said.
Yet, the expected oversupply in 2025 is capping the war premium gains. Despite the heightened tensions between Russia and the Western powers, the fundamentals remain unsupportive as they currently point to an oversupplied market next year.
Weak fundamentals could prompt the OPEC+ group at the December 1 meeting to delay – once again – the output increase currently planned to begin in January, according to recent market speculation.
Despite weak fundamentals, oil prices could be boosted by geopolitics at the end of this year and early next year.
In another escalation from an antagonist of the U.S. and its Western allies, Iran said at the end of last week that it would launch “new and advanced” centrifuges in response to a resolution of the International Atomic Energy Agency (IAEA) that censures Tehran for what the agency described as a lack of cooperation.
Iran’s most recent nuclear activities raise the already high probability that incoming U.S. President Donald Trump would adopt a tougher stance against Tehran and enforce stricter sanctions on Iranian oil exports.
Reduced supply from Iran, which sells most of its sanctioned oil at below-market prices in China, would push oil prices higher.
Significantly lower Iranian oil supply is a key upside risk to oil prices in the near term, alongside the rising geopolitical and war premium.
Global demand is holding weaker than previously thought, the high spare capacity in several OPEC producers, and the increasing non-OPEC+ supply are key downside drivers.
As the year ends, geopolitical tensions could result in increased volatility in the oil markets.
By Tsvetana Paraskova for Oilprice.com
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