Oil Reacts to Ukraine Ceasefire Hopes

The prices of WTI (CL) and Brent (EB) crude oils marked a 2-day increase on Monday, 17 March, as geopolitical tensions escalated in the Middle East in the wake of US attacks on Houthi targets. 

WTI rose 1.5% to $68.19 per barrel, while Brent saw an increase of 1.42% to $71.58.

Oil prices received support from optimistic demand expectations following the announcement of a special plan by top oil importer China and the release of positive retail data.

However, gains were capped by rising prospects of a potential ceasefire deal in Ukraine and escalating trade tensions. 

US President Donald Trump and Russian President Vladimir Putin are expected to talk today, Tuesday, to discuss ways of bringing the Ukraine war to an end.

US-Iran Tensions Escalate Over Weekend

Trump ordered a ‘decisive and powerful’ military action against Houthi militia over the weekend and noted that behind Houthi attacks lies Iran. The US President claimed that the Houthis had launched attacks at US and allies’ aircraft in the Red Sea and the Gulf of Aden, saying attacking Yemen was a retaliatory move. The Iran-backed group had been designated by the US as a Foreign Terrorist Organisation in late 2023. 

Iran is an OPEC member that accounts for 12% of the global oil reserves. In the aftermath of sanctions against Russia since 2022, it currently supplies around 1.5 million barrels per day. With the supply representing 1.4% of global production, crude oil prices rose to a two-week high. (Source: EuroNews)

Crude prices traded at multi-year lows last week as OPEC+ announced it would start production increases of around 138,000 barrels per day from April. However, prices have started to rebound since the US warned Iran of tighter sanctions.

US Secretary of State Marco Rubio and Russian Foreign Minister Sergei Lavrov discussed raising tensions in the Red Sea and pushed for a resolution.

Ukraine Ceasefire Hopes Weigh on Crude

According to Trump, he and President Putin are poised to discuss the situation over a call today, Tuesday. This follows recent talks on 11 March in Saudi Arabia between the US and Ukraine in light of a possible 30-day ceasefire deal Ukraine agreed to. However, Russia pushed back, reacting positively to the terms but demanding additional conditions. 

Putin said that Russia has advanced “almost everywhere,” and any form of a ceasefire must include terms to halt mobilisation, military aid and keep Ukraine out of NATO. Previously, Ukraine signalled it would not stop its mobilisation or commitment to joining NATO during a temporary peace deal. 

As tensions in Kyiv and Kursk escalated on Sunday, Trump’s indication of concessions around land and talks about power plants have raised optimism about a ceasefire deal. Trump also pointed to a possible announcement on Tuesday on the matter, with both events raising fears of increased oil supply.

Oil Outlook Hangs on Various Factors

Despite the markets’ focus on Ukraine capping gains with the possible return of Russian production, a weaker dollar (DX) could support oil prices higher. Yet, concerns amid trade war tensions, with levies on crude oil applied on multiple fronts, weigh on expectations of the economic outlook. 

The EIA forecasts that oil supply will overtake demand by around 600,000 barrels per day this year. Goldman Sachs (GS) also lowered its 2025 price forecast for both WTI (at $67) and Brent (at $71) due to slower demand growth expectations and OPEC+ supply increases.

Meanwhile, the ongoing tariff rout and a still-high inflation threatened by further escalation raised fears of a possible stagflation. In turn, the Fed might be placed in a tough spot of having to cut rates to ease the burden on borrowing costs through a weaker dollar and support growth. Higher US production and a softer dollar are a bad combination for oil price growth amid heightened trade tensions. 

With the FOMC next up tomorrow, Wednesday, 19 March,  and unemployment on the rise due to federal job cuts, any signals by the Fed of a worrisome economic outlook could weigh on market sentiment.

Conclusion

WTI and Brent oil prices remain caught in a rickety balance between optimism over ceasefire and trade resolutions, and ongoing economic uncertainties. 

While hopes for a Ukraine ceasefire and increasing supply from OPEC+ signal potential downward pressure, ongoing tensions in the Middle East and a weaker dollar could provide support. 

As market drivers for the dollar and the US economy continue to evolve, volatility might persist in the near term unless the Fed provides some clarity. However, there are no guarantees in markets, and past performance cannot predict what will happen.