SunSirs: Geopolitical Tension&Federal Reserve's Expectation of Interest Rate Cuts, Crude Oil Prices Rising by nearly 3%

On December 26th, international crude oil futures rose, with a significant increase on the first trading day of the Western Christmas return. The settlement price of the main WTI crude oil futures contract in the United States was $75.57 per barrel, with an increase of $2.01 or 2.7%. The settlement price of Brent crude oil futures main contract was $80.85 per barrel, an increase of $2.05 or 2.7%. Mainly driven by the impact of the Red Sea and investor optimism, the market expects the Federal Reserve to soon enter a rate cut channel, and fuel demand is expected to be boosted.

Since the Yemeni armed forces launched attacks on passing ships in the Red Sea, oil prices have continued to fluctuate and rebound. On the one hand, the attacks by the Houser armed forces on ships have disrupted global shipping and trade, affecting water transport via the Suez Canal to Europe, which accounts for over 10% of global maritime trade volume. This has led to sustained strong oil prices since last week. On the other hand, the conflict between Israel and Hamas has not shown any signs of easing, and the Israeli Palestinian conflict in the Gaza Strip has expanded to other parts of the region, which will have a long-term impact on oil prices.

Due to the joint forces formed by multiple countries starting to protect the Red Sea shipping industry from attacks by Yemeni Hussai armed groups, diverted ships are gradually resuming routes through the Red Sea. Dafei Group is increasing the number of ships passing through the Suez Canal, which has to some extent alleviated people's concerns. The risk premium caused by conflicts in the region is expected to return in the later stage.

Inflation data continues to fall, and the warming of economic data has strengthened the expectation of the Federal Reserve lowering interest rates. Currently, the probability of the Federal Reserve lowering interest rates in March next year has reached 69.9%. A decrease in interest rates will stimulate the economy, reduce consumer borrowing costs, and also create favorable conditions for the fuel market, increasing demand for crude oil. Meanwhile, the continued weakness of the US dollar has also boosted the valuation of oil prices, with the US dollar continuing to decline on Tuesday, hitting a five month low.

The scale of production reduction in the previous OPEC+meeting was relatively conservative and did not bring significant positive feedback to oil prices. At the same time, there are also many differences among its internal members, and the implementation of the difficult production reduction agreement is also questionable. This resulted in WTI oil prices falling below $70 earlier. But recently, the Russian side stated that their exports continue to decrease and are expected to continue to decrease by 100,000 to 200,000 barrels per day within the quota promised by OPEC+. This news also brings some positive news to the market. At present, the market still has expectations for the next OPEC+ meeting to further deepen production reduction.

SunSirs crude oil analysts believe that the current sustained rebound in oil prices is mainly affected by geopolitical tensions. In the medium to long term, the supply-demand game remains the main logic of transactions: on the supply side, OPEC+deepens production cuts, and the expected increase in US production will show a trade-off. On the demand side, the depreciation of the US dollar and the expectation of a Fed rate cut will boost oil prices. Overall, the short-term impact of the geopolitical situation on oil prices will continue to explore upward space, while the medium to long-term supply and demand will exacerbate the wide range fluctuations in the oil market.

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