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Oil flat as surplus supply balances out Red Sea crisis

(Montel) Oil prices were little changed on Monday morning after having lost their Friday session gains as ample availability weighed over the intensifying attacks in the Red Sea region.

The front-month contract for Brent crude North Sea oil was last seen up USD 0.12 at USD 78.41/bbl, while the WTI equivalent was USD 0.01 lower at USD 72.67/bbl.

The benchmark Brent contract reached on Friday a high of USD 80.75/bbl as US and UK military forces carried out airstrikes against Iran-backed Houthi rebels in response to ongoing attacks on commercial ships near Yemen.

 But despite the intensifying situation, oil prices later retreated from the gains, with the Brent front-month closing at USD 78.29/bbl, below the previous week’s close at USD 78.76/bbl.

“While geopolitical risks are certainly building, we are still not seeing a reduction in oil supply as a result of developments in the region,” analysts at ING Bank said.

Nevertheless, they added, the escalating crisis cannot be ignored with the market having to “start pricing in the larger risk of supply disruption”.

“There remains some doubt around the impact [of the Red Sea crisis] on oil supply, with prices giving back some of the gains late on Friday,” said analysts at Australia’s ANZ Bank.

“Further rises would depend on whether Iran is drawn more into the conflict,” they said, referring to a key Opec member.

On the supply front, while some members of Opec have been voluntarily curbing production, crude output from non-Opec nations, notably the US, has been hovering at record highs. This, along with modest global demand, could push the market in a global surplus this year, analysts have said.

"The shift in global oil supply from key producers in the Middle East to the United States and other Atlantic Basin countries, and the dominant impact of China and its booming petrochemical sector on oil demand, are profoundly impacting global oil trade," the International Energy Agency said last month.

Volatility going forward
Oil prices were likely to remain volatile in the near term as a mix of bullish and bearish factors continue influencing the market, said Priyanka Sachdeva, senior market analyst at Phillip Nova.

“Volatility and price fluctuations will be an integral part of crude oil going forward,” she said in a note.

Market eyes will once again be on US commercial crude oil stocks, which increased by 1.3m barrels in the first week of January, according to data from the Energy Information Administration.

Meanwhile, recent data pointed to a significant recovery in crude oil demand in China, the biggest oil importer globally, the Phillip Nova analyst said.