Oil & Gas

Oil prices surged more than 2% on Tuesday, driven by escalating tensions in Lebanon and expectations that OPEC+ will announce an extension of its production cuts. Brent crude futures posted their biggest gains in two weeks, climbing by $1.79, or 2.5%, to settle at $73.62 per barrel. Similarly, U.S. West Texas Intermediate (WTI) crude futures rose $1.84, or 2.7%, to close at $69.94 per barrel. The price hike was fueled by Israel's threat to attack Lebanon if its ceasefire with Hezbollah collapses, along with concerns over potential OPEC+ actions.

Israeli forces have continued airstrikes in southern Lebanon, targeting Hezbollah fighters they claim are violating last week's truce. Lebanese officials have urged the U.S. and France to press Israel to uphold the ceasefire. The threat to the fragile truce has heightened concerns among oil traders about broader instability in the Middle East, particularly as tensions between Iran and Israel remain high. While the conflict has yet to impact oil supplies directly, analysts like Giovanni Staunovo from UBS are closely monitoring the situation, as escalating tensions could affect regional stability.

In addition to geopolitical concerns, OPEC+ is expected to extend its output cuts when the group meets later this week. Sources indicate that the alliance could prolong the reductions until the end of Q1 2025, as a way to counter the market surplus that has pressured prices. OPEC+—which controls around half of the world’s oil production—has been balancing the gradual unwinding of cuts with the need to support oil prices, which have been trading nearly 6% below their December 2023 average. Analysts, including those at Goldman Sachs, expect compliance from key members like Russia, Kazakhstan, and Iraq to bolster the success of the extension.

However, despite these supportive factors, the global oil demand outlook remains weak. U.S. crude oil inventories rose by 1.2 million barrels for the week ending November 29, indicating soft demand. Analysts also predict that China's crude imports could peak as early as next year, as transport fuel consumption wanes. With weaker demand prospects and rising inventories, oil prices may face downward pressure in the long term. Francisco Blanch, head of global commodities at BofA Securities, suggested that oil prices could fall further as global demand growth slows, particularly as China, a key driver of global oil consumption, is expected to contribute less to overall demand growth in the coming years.