Why Oil Prices Ignore Houthis’ Attacks?

Key Insights

• Oil is down by more than 10% since Israel – Hamas conflict began. 
• Houthis’ attacks on vessels and U.S. retaliatory strikes did not provide support to oil markets. 
• Traders stay focused on demand and worry that China’s economy would underperform in 2024. 

Typically, rising tensions in the Middle East are bullish for oil. However, those who bet on oil since the start of Israel – Hamas conflict were disappointed, as oil prices are down by more than 10% since early October. What’s going on?

China’s Economic Problems Raise Demand Worries

China has not fully recovered after the coronavirus crisis. The country’s real estate sector, which is a key part of its economy, remains under pressure due to huge debt load of many developers.

China has introduced various stimulus measures but there are no signs indicating that they provided a material boost to the economy in the near term.

Last week, China’s inflation reports showed that Inflation Rate increased from -0.5% in November to -0.3% in December. Falling prices highlight economic problems, so traders are worried that China’s demand for oil would be lower than previously expected.

Europe Remains Under Strong Pressure

Recent PMI reports showed that Europe’s manufacturing segment remained under significant pressure. Prices for natural gas in Europe test multi-month lows due to the weakness of manufacturing demand.

In the near term, there are no catalysts for rapid improvements in Europe. The ECB is expected to start cutting rates this year, but it remains to be seen whether rate cuts would provide material support to oil demand in the region.

Military Conflicts Did Not Reduce Oil Production

Fears about a broad conflict in the Middle East did not materialize. While traders stay focused on the developments in the Israel – Hamas conflict and Houthis’ attacks on vessels, oilfields operate as usual.

At this point, the market does not believe that any force in the region is ready to disrupt oil production. Thus, oil prices do not react to Houthis’ attacks or retaliatory strikes from the U.S.

Oil Needs More Demand To Move Higher

Traders should focus on the dynamics of demand from China, which could be one of the biggest drivers for oil prices in 2024. Ultimately, stimulus measures would work, providing additional support to WTI oil and Brent oil. In the near term, geopolitical developments may provide some support to oil prices, but a real change in the nature of current conflicts is needed to provide a sustainable boost to the price of oil.

For a look at all of today’s economic events, check out our economic calendar.