Oil prices saw modest gains on Monday following an escalation in the Russia-Ukraine conflict, which saw Russia launch its largest air strike on Ukraine in nearly three months.
The intensifying military clashes raised concerns about potential disruptions to global energy supply, giving oil prices a slight boost. However, concerns about fuel demand in China, the world’s second-largest oil consumer, and forecasts of a global oil surplus continued to weigh on the market.
Brent crude futures rose by 29 cents, or 0.4%, to $71.33 per barrel by 0502 GMT, while U.S. West Texas Intermediate (WTI) crude added 18 cents, or 0.3%, to trade at $67.20 per barrel.
The increase in oil prices came as Russia unleashed a significant airstrike on Ukraine on Sunday, marking the largest such attack in nearly three months.
The airstrike caused severe damage to Ukraine’s power grid, raising concerns about further disruptions to Ukrainian infrastructure and the broader European energy market.
The potential for prolonged conflict and increased geopolitical risk has added to market volatility, though global oil prices remain below previous highs amid concerns of oversupply.
The escalation in the conflict has also coincided with a shift in U.S. policy, as President Joe Biden’s administration has reportedly allowed Ukraine to use U.S.-made weapons for deeper strikes inside Russian territory.
This move represents a significant reversal of U.S. policy, with Washington previously limiting the range of weapons provided to Ukraine. According to two U.S. officials and a source familiar with the matter, the decision is intended to help Ukraine in its ongoing fight against Russian forces.
However, the Kremlin has yet to respond, though it has warned that any move to relax limits on Ukraine’s weapons would be seen as a major escalation of the conflict.
Despite the geopolitical tensions, oil prices were capped by persistent concerns over weakening demand in China. The country’s economic recovery has been slower than expected, and fears of a potential slowdown in the world’s largest oil importer continue to dampen expectations for a strong rebound in fuel consumption.
Analysts point to the potential for a global oil surplus as OPEC+ members, particularly Russia and Saudi Arabia, continue to pump oil at higher-than-expected levels.
The prospect of a global oil surplus is further compounded by the possibility of rising oil production in the U.S., where drillers have ramped up activity in recent months. According to recent reports, U.S. oil production is on track to hit record highs in the second half of the year, which could contribute to an oversupply in the global market.
The combination of geopolitical uncertainty and concerns about oversupply has created a delicate balancing act for oil markets. While the Russia-Ukraine conflict remains a key risk factor, the ongoing challenges in global oil demand, particularly from China, continue to weigh heavily on investor sentiment.
The week ahead is expected to see continued volatility in oil markets as traders digest the latest developments in Ukraine, monitor economic data from China, and track any changes in production levels from major oil-producing countries. With global oil inventories still high and demand growth uncertain, oil prices may remain under pressure in the near term.
