Oil poised for first monthly gain since September as Middle East on brink of wider conflict

Environment

Oil prices are on pace for the first monthly gain since September as the U.S. and Iran stand on the brink of a more direct confrontation in the Middle East.

The West Texas Intermediate contract for March was last down $1.09, or 1.40%, to trade at $76.73 a barrel on Wednesday. The Brent contract for March was trading at $81.90 a barrel, down 97 cents or 1.17%.

Prices fell Tuesday after China factory activity contracted for the fourth consecutive month. WTI and Brent, however, are up 6.98% and 6.31% respectively for January.

“The factory data confirms our view that China, at least for now, is an impediment to global oil demand growth,” Tamas Varga, an analyst with the crude broker PVM, wrote in a Tuesday note.

Though Chinese economic data is weighing on the market, prices have risen for the month on stronger than expected U.S. growth, disruptions to crude supplies in the U.S. due to winter storms, and Beijing’s efforts to simulate its economy.

The market is also waiting for the Federal Reserve’s decision on interest rates Wednesday as well as crude inventory data in the U.S.

U.S., Iran on the brink

Geopolitical tensions are also simmering in the Middle East with the U.S. and Iran standing on the precipice of a more direct confrontation, highlighting the potential risk to crude supplies in the region.

“The spreading conflict in the Middle East remains the most visible and growing risk for energy markets,” Natasha Kaneva, head of global commodities research at JPMorgan, told clients in a research note Tuesday.

“While escalation 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,” Kaneva wrote.

Iran-allied militants have killed three U.S. soldiers in a drone strike in Jordan and hit an oil tanker with a missile in the Gulf of Aden in a series of major escalations since Friday.

President Joe Biden said Tuesday that he has decided on a response to the death of U.S. troops and holds Iran responsible for supplying the militants with weapons. Defense Secretary Lloyd Austin said the administration “will take all necessary actions to defend the United States, our troops, and our interests.”

U.S. officials told NBC News on Wednesday that the White House is planning a “campaign” that could last several weeks. The targets, which have not yet been finalized, are expected to include Iranian targets outside Iran in multiple places in several countries and locations, the officials said.

Iran has denied involvement in the attack that killed U.S. troops. Tehran said Wednesday it would “take decisive action in case of any US aggression,” according to the state news agency IRNA.

The response in the oil markets to the simmering tensions in the Middle East has been muted so far because there has not been a major disruption to crude supplies. Analysts have repeatedly warned that a direct confrontation between the U.S. and Iran could send oil prices higher if there’s a major disruption in the Strait of Hormuz, the crucial chokepoint for crude flows.

Retired U.S. Navy Admiral James Stavridis, former NATO Supreme Allied Commander, told CNBC Tuesday that the death of U.S. troops raises the risk of a wider conflict, though he noted that neither the U.S. nor Iran want a wider war.

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