Oil posts weekly gain as Middle East tensions rise

Israel's rejection of ceasefire proposal from Hamas deals blow to peace efforts to end Gaza war

A car that was destroyed by Israeli air strikes in Rafah, Gaza. The war has kept oil prices elevated. Getty Images

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Oil posted a weekly gain as Middle East tensions continue after Israel rejected a ceasefire proposal from Hamas, dealing another blow to efforts to end the four-month-long war.

Brent, the benchmark for two thirds of the world’s oil, rose 0.69 per cent to close at $82.19 a barrel.

West Texas Intermediate, the gauge that tracks US crude, surged 0.81 per cent to settle at $76.84 a barrel.

The Israel-Gaza war, which has entered its fifth month, has kept oil prices elevated.

Brent and WTI benchmarks surged on Thursday, settling around 3 per cent higher, rising above the $80 and $75 levels, respectively, for the first time this month.

High oil prices have been the result of "diminishing prospects of a ceasefire in the Israel-Gaza war", Han Tan, chief market analyst at Exinity Group, told The National.

"Markets have been prompted recently to restore geopolitical risk premiums into oil benchmarks amid still-persistent supply-side risks," he said.

"Oil prices are set to remain sensitive to the fluid developments surrounding the ongoing tensions in the Middle East, set against the broader context of global supply-demand dynamics."

Despite intense US and international efforts to bring about a truce, Israeli Prime Minister Benjamin Netanyahu appeared to dismiss such talk on Wednesday and vowed his country's military would keep fighting Hamas in an attempt to achieve “absolute victory”.

On Thursday, US President Joe Biden aimed some of his most direct criticism at Israel since it invaded the Gaza Strip in October, saying the actions of its military have been “over the top”.

Mr Biden also said he was working “tirelessly” to push for a deal that would lead to a “sustained pause” in the fighting.

Investors are also monitoring events related to the conflict, particularly Houthi attacks on ships in the Red Sea, said Rania Gule, a market analyst at XS.com.

"This cautious market movement is expected in the short term," she said.

In addition, crude oil futures may receive "positive support" if the Federal Reserve decides to lower interest rates this year, should the US economy meet expectations, Ms Gule said.

The US central bank held its interest rates steady on January 31, while also affirming they will remain elevated until the central bank is confident inflation is moving closer to its 2 per cent goal.

It also asked for patience, warning that cutting rates too soon could undo much of the progress they have made on taming inflation.

"I believe there is confusion in the markets due to conflicting signals from the Federal Reserve, causing markets to now await monetary easing for a prolonged period, heightening risk in the market," Ms Gule said.

Meanwhile, US crude stocks, an indicator of fuel demand, increased by 5.5 million barrels last week, according to the US Energy Information Administration.

However, distillate stocks fell by 3.2 million barrels and petroleum stocks dropped by 3.15 million barrels in the week that ended on February 2, EIA data showed.

Analysts were expecting distillate inventories to fall by a million barrels and gasoline stocks to increase by 140,000 barrels, according to Reuters.

Opec+, on the other hand, decided to keep its oil output policy unchanged at its meeting on February 1 but said it would “continue to closely assess market conditions” and stand ready “to take additional measures at any time”.

The group has 2.2 million barrels per day of voluntary production cuts in place until next month, which is in addition to production cuts of 3.66 million bpd agreed on earlier.

Swiss lender UBS expects Opec+ to extend the voluntary cuts to the middle of the year.