What's driving the spike in oil prices

Oil prices (CL=F, BZ=F) are rising on Monday as Middle East tensions escalate following an Israeli strike on Hezbollah in Lebanon over the weekend. Also driving prices is Libya's decision to halt oil exports. Path Trading Partners' Bob Iaccino joins the Morning Brief to discuss the outlook for the oil market.

Iaccino argues that "supply and demand is widely balanced" given that oil prices have been stuck in a trading range. He notes that demand fears are "really entrenched in the market right now," and inventories are high, suggesting that "there actually has to be a disruption" to supply to significantly alter the current trajectory.

"My overall stance on crude oil is that demand fears are just too great at this point. And when you look at what's going on with the Fed and how they're about to start rate cuts, that doesn't necessarily lend to a picture of stronger demand in the short term," Iaccino explains.

Regarding OPEC's potential shift in oil production outlook, Iaccino believes the organization is "stuck between a rock and a hard place." He points out that since cutting production, they've continued to lose market share to non-OPEC producers. However, he notes, "they can't cut production while prices are falling because it won't work," due to other producers picking up the slack.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

Video Transcript

Escalating tensions in the Middle East over the weekend causing a spike in oil prices.

Israel launching what they call pre emptive strikes at Hezbollah targets inside Lebanon here with analysis on what the growing conflict means for the oil markets.

We want to bring in Bob.

I Aino.

He's path trading partners, co founder and chief market strategist Bob.

It's good to see you here.

So let's talk about this move higher that we're seeing in the price of oil and the heels of the escalating geopolitical tensions.

You have oil up today, crude up about 3.5%.

What do you think of the move higher?

And I guess, are we heading above 80?

Well, I'm glad you brought up that particular level, Shana because that's the critical level.

Oil has been in basically a sideways channel since last October.

And it's a very wide channel and we've had sort of intermittent periods of different little bullish channels and bearish channels within that wider sideways move.

And the interesting thing about crude oil specifically is it is a pure supply and demand market.

And I promise I'm getting to your question.

But when you see oil trading the way it is right now, supply and demand is widely balanced.

Now, we've got demand fears and those are really entrenched in the market right now, both globally and in the US.

And we've got inventories at very high levels.

When you talk about geopolitics with crude oil right now, you're talking about a situation where there actually has to be a disruption.

It's almost as if the market forces have matured a little bit to actually win for disruption.

And we did get that, that wasn't necessarily militarily if that's a word related.

It was Libya where Libya actually said they're going to halt crude oil production temporarily.

And that's why I think this particular move this morning might have some legs behind it.

I mean, my overall stance on crude oil is that demand, fears are just too great at this point and when you look at what's going on with the fed and how they're about to start rate cuts, that doesn't necessarily lend to a picture of stronger demand in the short term.

Are, are you kind of envisioning any scenario where we see a, a surprise or any type of shock come out of OPEC, especially considering that they've already committed to gradually phase out the cuts of 2.2 million barrels per day.

Um That between October of this year and September of 2025 I mean, how, how much of a risk also would that put into the system that's why I love you guys, Brad because you guys asked the correct questions.

That is the correct question because OPEC has done that in the past.

They don't have an official scheduled meeting, but they have what they call extraordinary meetings that they do.

Often.

The last time they interrupted and changed production.

Mid meeting was as recently as 2020.

And we all know why that was.

We know what was happening in 2020.

This particular case, they're kind of stuck between a rock and a hard place because they're losing market share.

They've cut production total of about 9.7 million barrels a day starting in 2022.

And some of these other producers, the US and non OPEC producers like Guyana and Brazil have picked up that slack.

So does OPEC continue to lose market share because of their uh lack of and they're sort of driving their prices a little bit higher although they're cutting prices to Asia, I think they might, I think they actually might mid meeting say we're going to cut prices on the backs of some of the short term price rises.

But they learned as did the Bank of Japan that they have to go with the trend.

They can't cut prices while prices are falling or I should say cut production while prices are falling because it won't work.

There's too many other suppliers that are filling that gap right now.