Oil prices edged higher in early trading on Tuesday after a decline in the previous session. Investors are evaluating a potential ceasefire between Israel and Hezbollah, which has affected oil’s risk premium. As of 07:05 GMT, Brent crude futures rose by 15 cents, or 0.21%, to $73.16 a barrel, while U.S. West Texas Intermediate crude futures increased by 15 cents, or 0.22%, to $69.09 a barrel. Both benchmarks had settled down by $2 a barrel on Monday after reports indicated that Lebanon and Israel had agreed upon terms to end the Israel-Hezbollah conflict, leading to a selloff in crude oil.
Priyanka Sachdeva, a senior market analyst at Phillip Nova, commented that the market reaction to the ceasefire news was “over the top.” Although the news mitigated fears of disruption to Middle Eastern supply, the Israel-Hamas conflict “never actually disrupted supplies significantly enough to create war premiums” this year. She noted, “The vulnerability of oil prices to geopolitical headlines lacks a solid foundation and, combined with the inability to sustain recent gains, indicates weakening global demand for oil and suggests a volatile market ahead.”
Iran, a supporter of Hezbollah and a member of OPEC, produces around 3.2 million barrels per day, accounting for about 3% of global output. A ceasefire in Lebanon could decrease the chances that the incoming U.S. administration will impose strict sanctions on Iranian crude oil, according to analysts at ANZ.
If President-elect Donald Trump’s administration reinstates a maximum-pressure campaign on Tehran, Iranian exports could potentially shrink by 1 million barrels per day, tightening global crude flows. TotalEnergies announced on Monday that it would pause its business with the Adani Group, stating it would freeze further payments to the Indian conglomerate.
In Europe, Kyiv, Ukraine’s capital, is currently enduring a sustained Russian drone attack, according to Mayor Vitali Klitschko. Hostilities between major oil producer Russia and Ukraine intensified this month after U.S. President Joe Biden permitted Ukraine to use U.S.-made weapons to strike deep into Russian territory, marking a significant shift in Washington’s policy in the Ukraine-Russia conflict.
Additionally, OPEC+ may consider maintaining its current oil output cuts starting January 1 at its next meeting, as noted by Azerbaijan’s Energy Minister Parviz Shahbazov. The producer group has already postponed increases due to concerns over demand.
On Monday, Trump announced he would sign an executive order imposing a 25% tariff on all imports from Mexico and Canada. It remains unclear whether this would include crude oil. The majority of Canada’s 4 million barrels per day of crude exports are sent to the U.S. Analysts have suggested it is unlikely that Trump would impose tariffs on Canadian oil, as it cannot be easily substituted due to differing grades from those produced in the U.S.
Market analyst Tony Sycamore at IG stated, “Contrary to today’s sell-off in risk assets, I believe the tariff announcements are actually risk-positive because they are lower than consensus expectations.” He also highlighted that Trump’s proposed additional 10% tariffs on Chinese imports are “well below” the 60% level he threatened before the election.
For the time being, markets are watching Trump’s plans to increase U.S. oil production, which has been near record levels throughout 2022 to 2024 and has managed to absorb supply disruptions from geopolitical crises and sanctions, according to Sachdeva from Phillip Nova.