Oil prices paused their recent rally on Tuesday, pulling back slightly after surging over 7% in the past three sessions due to supply concerns stemming from fears of a broader Middle East conflict and potential disruptions in Libyan oil production.
As of 0430 GMT, Brent crude futures dipped 18 cents, or 0.2%, to $81.25 a barrel, while U.S. West Texas Intermediate (WTI) crude futures declined 28 cents, or 0.4%, to $77.14 a barrel.
“The losses in oil prices today seem relatively contained, suggesting the market is taking a breather after the sharp rally of recent days,” said Yeap Jun Rong, a market strategist at IG. He added, “With oil prices factoring in geopolitical risks in the Middle East and the potential production halt in Libya, market participants are now adopting a wait-and-see approach to assess further developments.”
The sharp rise in oil prices over the previous three sessions was fueled by expectations of U.S. interest rate cuts that could boost fuel demand, escalating military tensions between Israel and Hezbollah in Lebanon, which could disrupt supply from the key producing region, and concerns about potential closures of Libyan oil fields.
During this period, WTI gained 7.6% and Brent rose by 7%.
The eastern administration in Libya announced on Monday that oil fields in eastern Libya, responsible for nearly all of the country’s production, would be closed, halting both production and exports. This decision followed rising tensions over the leadership of the central bank. However, there was no confirmation from Libya’s internationally recognized government in Tripoli or the National Oil Corporation (NOC), which oversees the country’s oil resources.
This political dispute could potentially impact nearly all of Libya’s 1.17 million barrels per day of oil output, based on the latest Reuters survey data from the Organization of the Petroleum Exporting Countries (OPEC) in July.
While concerns about global oil demand, particularly from China, could exert downward pressure on oil prices, the potential shutdown of Libya’s oil fields could tighten supply and slow the decline in prices, according to Vortexa analyst Serena Huang. She also noted, “Other oil producers may be benefiting from higher oil prices and might not rush to increase supply immediately.”
The escalation of conflict between Israel and Hezbollah, marked by significant missile exchanges as Hezbollah retaliates for the killing of a senior commander last month, has also supported oil prices. “Markets remain on edge as skirmishes between Israel and Hezbollah intensify,” analysts at ANZ wrote in a note.
Despite these tensions, a top U.S. general stated on Monday that the risk of a broader war had somewhat diminished, although the possibility of an Iranian strike on Israel remains a concern.
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