‘Fear alone is not enough’ to drive oil prices higher. Here’s why.

But “we have gotten used to living in a new normal of compound volatility,” she told MarketWatch, referring to the combination of near-term risks to growth, which include geopolitics and political uncertainty. “There have been so many events and threats that fear alone is not enough anymore” to really influence prices.

Global benchmark Brent and U.S. benchmark West Texas Intermediate crude prices have declined over the past six months, pressured by worries about the outlook for energy demand and a lack of oil-supply disruptions in the Middle East offsetting support from OPEC+ output cuts and threats to global supplies.

As of Wednesday, front-month Brent crude
BRN00,
+0.10%

BRNJ24,
+0.10%
has fallen by more than 4% over the last six months to $81.71 on ICE Futures Europe, while WTI crude
CL.1,
+0.05%

CLH24,
+0.05%
has seen a six-month decline over 7% to at $75.85 on the New York Mercantile Exchange.

Wars

While the violence in the Middle East tied to the Israel-Hamas war that began in early October continue to plague the headlines, there has been no notable impact on global oil supplies.

“There has been zero effect on physical oil production in the Middle East” despite everything that has happened since early October, said Pavel Molchanov, analyst at Raymond James.

Israel, Gaza, Lebanon, Syria, and Yemen have virtually no oil production domestically, he said. The only way this situation could result in a supply disruption is if Iran were to “engage in a direct military confrontation” with Israel and/or the United States.

Tehran’s leadership is being “very careful to avoid that scenario,” said Molchanov.

U.S. President Joe Biden has said that he is not looking to widen the war in the Middle East but has vowed to retaliate for a drone attack over the weekend by an Iran-backed group that killed three U.S. troops in Jordan.

Read: Oil prices fall despite ‘grave escalation’ of Middle East crisis. Here’s why.

In Russia, analysts have said Ukrainian attacks on oil infrastructure in recent days, including a strike on a Russia oil refinery on Jan. 19, have been particularly worrisome. 

In a note Tuesday, J.P. Morgan said there have been five recorded Ukraine-linked drone attacks on Russia energy infrastructure” and that the attacks on Russian refiners pose a “new, less appreciated, but potentially more damaging threat to oil production balances” than the conflict in the Middle East.

Molchanov pointed out that Russia is among the world’s top oil and gas exporting countries so what happens in Russia has “consequences for international energy markets.”

Demand prospects

Still, prospects for oil demand may be more important to the market than the current risks to global supplies.

Barring the extremely unlikely scenario of a major war involving Iran, the “number-one source of uncertainty is on the demand side of the equation,” Molchanov told MarketWatch.

China is facing “quasi-recessionary conditions,” and the U.S. and Europe have historically high interest rates, he said. “All of that is a recipe for downside risk vis-à-vis oil demand.”

Saudi oil output

Meanwhile, Saudi Arabia’s state-owned Saudi Aramco said Tuesday that it would halt previously-announced plans to expand its oil production. It had planned to raise its daily output to 13 million barrels but has decided to maintain output at 12 million barrels a day.

With Saudi production currently estimated at around 9 million barrels per day, the decision not to fund the development of additional spare capacity above the current level of 3 million barrels a day “makes sense,” said Robert Ryan, chief commodity and energy strategist at BCA Research.

This “frees up funding” for other Vision 2030 projects and for dividends to the Public Investment Fund, a sovereign-wealth fund, and the state, he said. Vision 2030 refers to the Saudi’s economic transformation program.

Moving up?

Prices for oil showed signs of lift on Wednesday, settling higher for the month of January and marking their first monthly gain in four months.

Risks to global supply remain high but so far, the Red Sea disruptions have only delayed supplies and have “not cut them off,” said Phil Flynn, senior market analyst at The Price Futures Group.

The threat to supplies, however, is “greater with the increased tension, and there is a possibility of a major price spike should things go bad,” he said.