Crude oil continues to rise for a third day in a row with gains of around 0.4% for both major benchmarks, Brent and West Texas Intermediate, which are approaching $74 and $70 per barrel, respectively.
This week’s rebound in oil prices comes amid concerns that the escalating conflict on the Russian-Ukrainian front could spiral out of control, potentially disrupting crude supplies.
Just days after the United States allowed Ukraine to target Russian depth with ATAMCS missiles, they have already been launched, prompting Russia to amend its nuclear doctrine, which could threaten to take the conflict to an unprecedentedly dangerous stage.
Russian Foreign Minister Sergei Lavrov said after the missiles were used that this escalation is a new phase in the war.
The nuclear scenario may be an extreme one that is currently unlikely, in my opinion, as long as there is no significant shift in the balance of power in favor of Ukraine, as Russia can more effectively confront the attacks or intensify its air strikes to neutralize launch vehicles and storage sites, i.e. contain the escalation.
But what this provocation may lead to for the Russian side is the latter’s attempt to pressure the US by posing a greater threat to its interests by increasing sabotage operations in European countries or supporting the Houthis in Yemen, which is what officials are really afraid of, as The Wall Street Journal says.
If this escalation is actually contained, which is intended to strengthen the negotiating position of both parties before Donald Trump returns to the White House in January, the focus may return to the weak fundamentals in the oil market, most notably the demand for crude from China. This may lead to a renewal of severe losses.
China is the key focus area for the energy market, and the latter still seems pessimistic about the future of demand for crude from its largest importers in the world. Markets have previously reacted negatively to the announcement of multiple support packages in China, as experts believe they are not enough to support consumption and boost weak domestic demand. In addition to the discouraging internal conditions, external demand – which China is counting on to drive growth – may also come under pressure as trade wars escalate with Trump’s return.
With concerns about the trade war and the damage it may cause to Chinese exports, economists expect, according to a Reuters survey, that the Chinese economy may see a slowdown in GDP growth to 4.2% in 2026, down from 4.5% growth expected for the coming year.
In contrast, US-China trade relations are very complex and intertwined, and the next phase of the US administration may not be limited to just imposing huge tariffs on China alone. In recent weeks, we have seen reports about the measures that China may take to deter Trump from imposing these huge tariffs. In addition, experts were talking about the damage that may be caused to the US economy as a result of this trade war and skepticism about the possibility of imposing such a large amount of tariffs in the first place.
Among those skeptical of the benefits of Trump’s protectionist policies is economist Paul Krugman, who won the Nobel Prize for his contributions to international trade theory. Krugman, in an opinion piece in The New York Times, argues that the US could lose the trade war under the next administration for a number of reasons, including what he calls Trump’s “ignorance” of how international trade works, as he denials that tariffs will have any impact on American consumers.
In addition to concerns about the Chinese economy, growing pessimism about the long-term prospect of high US interest rates could add to the downside pressure on crude prices. The probability of a quarter-point rate cut by the Federal Reserve in January is now just 15% after exceeding 60% more than a month ago, according to the CME FedWatch Tool.
