It is perhaps understandable that ahead of the release of a critical set of economic and oil data the underlying trend is paused and some of the short positions are being covered. Today’s US CPI figure, which is expected to show an annual rise of 4% in core consumer prices and will undoubtedly influence the Fed’s narrative tomorrow on possible future interest rate cuts. The updated monthly oil balance reports from the EIA/OPEC/IEA triumvirate are widely anticipated to show no narrowing of the diverging views on oil consumption for 2024.

Oil prices ticked higher yesterday and are advancing further this morning aided by yet another strike of a commercial vessel in the Red Sea from Houthi rebels in Yemen, yet sentiment remains negative. There is no help coming from the demand side of the oil equation. Chinese consumer and producer prices deflated further last month indicating sluggish demand from the world’s second biggest economy whilst Saudi Arabia will reportedly export full contracted volume to several Asian refiners in January. The fundamental backdrop is discouraging. The bounce in outright prices might temporarily ease the pain of oil bulls but the deepening contango of the two main crude oil futures contracts suggests that any rally must be treated with the greatest of skepticism unless there are concrete signs of improving oil balance, something that is currently not palpable.
 

The Heat is On

In the light of the continuous OPEC+ efforts to bolster prices by reducing the group’s output levels the recent drop in oil prices might have come as an irksome surprise for some, especially that geopolitical tension has been on the rise of late. Yet, the risk premium has seemingly evaporated, or one might argue that without brewing hostility in different parts of the world the sell-off would be much more violent. Whatever the case maybe it is worth presenting a snapshot of the current state of affairs between warring nations. Although there has been no discernible impact on the oil balance, the disturbing turn for the worse in geopolitics is something that must be closely followed by those actively involved in oil trading.
 

The Middle East conflict: no-one can contest the undisputed right of any nation to protect itself from aggression. After the atrocious attack of Hamas on and the kidnapping of Israeli civilians on October 7 the country’s response was always going to be fierce and decisive. Whilst the declared target of Hamas is to wipe the Jewish nation off the face of Earth, after the appalling incursion to Israel the feelings are now mutual. Israel will not rest until Hamas is irrevocably obliterated – even if it comes at the expense of shocking Palestinian civilian casualties. It is under these circumstances that Israel’s staunchest ally, the US, has vetoed a UN resolution that called for a ceasefire, which will substantially contribute to the unequivocal collapse of humanitarian aid to Gaza with half of the region’s population already starving.
 

The extent of the Israeli retaliation of the despicable and horrible Hamas attack is divisive, to say the least – and plausibly against applicable international laws. What seems certain is that the Arab-Israeli rapprochement that was welcomingly tangible before October 7 has suffered a significant setback and it is simply impossible to know whether it will be restored any time in the foreseeable future. On the other hand, Arab oil producers have not resorted to weaponizing oil in order to rein in Israel and its allies and are unlikely to do so. However, the currently sporadic attacks by Iran-sponsored Houthis on commercial vessels in the Red Sea could escalate and in case worst comes to worst the eventual closure of the Strait of Hormuz, a crucial shipping artery could have a significant impact on oil exports from the Middle East.
 

The Ukrainian war: after Russia’s nefarious invasion of Ukraine the West ironclad determination to provide military and financial support foreshadowed that Russia’s defeat would only be a question of time. In an unsettling development, this enthusiasm has considerably been waning on both sides of the Atlantic as war fatigue sets in and political horse trading comes into prominence. The seeds of declining US support were probably sowed when the Democrats lost their majority in the House of Representatives after the midterm elections. It is, therefore, a logical consequence that Joe Biden’s proposed $110 billion package that includes $61 billion for Ukraine failed to clear legislative barriers. It forced the US President to warn that abandoning Ukraine would provide extra motivation for Vladimir Putin to continue with its territorial demands elsewhere in the name of national security.
The EU proposal to provide €50 billion for Ukraine is also far from being a foregone conclusion. On top of the EU financial aid, the start of Ukraine’s accession talks is also in jeopardy as Putin’s brazenly unconditional European ally, the Hungarian prime minister, has threatened to block the negotiations and aid over frozen EU funds. Political myopia and blackmail, together with internal Ukrainian power struggle, has handed the Russian president the most wonderful Christmas present he could possibly ask for. Ukraine has become a bargaining chip. The withdrawal of western support, explicit of otherwise, will not only vindicate Russia’s approach in its efforts of gaining leverage on the global political stage (and possibly result in slamming further sanctions on the country) but would encourage others, namely China, to pursue their territorial aspiration with impunity.
 

Venezuela/Guyana: autocrats learn from one another, and it is no coincidence that the changing fortunes of Russia’s war against Ukraine emboldened another dictator on the other side of the globe. The Venezuelan president, Nicolas Maduro, has threatened to annex two-thirds of the territory of neighbouring Guyana after holding a plebiscite (the favourite modus operandi of Hungary’s prime minister of justifying his actions) to ask his voters if they wanted Guyana’s Essequibo region, the area of recent significant oil discoveries, to become part of Venezuela – albeit practical steps of the occupation are implausible presently. Given that the aggressor is in the sphere of influence of Russia, China, and Iran whilst Guyana’s political and economic interests are much more aligned with that of the West the simmering tension is the perfect reflection and integral part of the ongoing attempts of vying for the dominant role in a multipolar world. It is only fitting to compare these regions to barrels filled with gunpowder and all it takes is a spark to send them up in flame.
 

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