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Oil rises on supply concerns amid Middle East tensions

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Brent crude futures gained 17 cents, or 0.21%, to $82.57 a barrel, and U.S. West Texas Intermediate crude was up 17 cents, or 0.22%, at $76.95 a barrel

Oil prices rebounded in early trade on Tuesday, following a more than 1% decline the previous session, as escalating geopolitical tensions in major producing region the Middle East fuelled supply concerns.

Brent crude futures gained 17 cents, or 0.21%, to $82.57 a barrel by 0401 GMT. U.S. West Texas Intermediate crude was up 17 cents, or 0.22%, at $76.95 a barrel.

Both the contracts dropped more than $1 on Monday as a deepening real estate crisis fuelled concerns about demand from China, the world’s biggest crude consumer, after a Hong Kong court ordered the liquidation of property giant China Evergrande Group.

Oil price trading above $80/bbl is pricing in some geopolitical risk premium again as flare ups continue in the Middle East region. This could fade out within a week or two if there is no strong reaction from the US, said DBS Bank’s energy sector team lead Suvro Sarkar.

If it does worsen into a US-Iran standoff and stricter sanctions, then we are looking at $80-100/bbl range for oil to sustain for some time, he said.

If U.S.-Iran tensions escalate, especially through a direct confrontation, the risk rises that Iran’s oil supply is adversely affected. Iranian’s oil exports are likely the most vulnerable via potentially greater enforcement of sanctions, said CBA analyst Vivek Dhar in a note.

Iran exported 1.2-1.6 million bpd of crude oil through most of 2023, Dhar said, representing 1-1.5% of global oil supply.

How Iran responds to rising U.S. tensions will also determine the course for oil markets. The key concern is Iran threatening a blockade of the Strait of Hormuz, which sees the transit of 15-20% of global oil supply, he said.

The gains also come ahead of a Federal Reserve rate decision, as the FOMC starts a two-day meeting on Tuesday.

Policymakers are expected to hold interest rates steady, but some investors believe the Fed could drop its hiking bias. Lower interest rates are positive for oil prices, and could further raise demand.

Markets now expect 47% probability of a Fed rate cut in March, according to the CME FedWatch tool, down from 88% a month earlier.

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