Key points:

  • Oil prices fluctuated between moderate declines and increases.
  • The decline in US oil inventories supported prices, while the strengthening of the dollar, on the contrary, exerted pressure.
  • Experts believe that the conflict in the Middle East will play an increasingly smaller role in the dynamics of oil prices.Dollar exchange rate and geopolitical conflicts – influencing factors

Oil prices fluctuated between modest declines and gains on Wednesday as traders grappled with the impact of rising geopolitical tensions, concerns about sluggish demand, and a strengthening dollar.

The front-month March Brent crude contract edged up 4 cents to $79.59 per barrel. West Texas Intermediate crude also rose 4 cents to $74.41 per barrel.

Despite a decline in U.S. crude oil inventories by 6.67 million barrels in the week ended January 19, gasoline inventories unexpectedly increased by 7.2 million barrels, raising concerns about fuel demand from the world’s largest oil consumer.

Dollar exchange rate and geopolitical conflicts influence the oil prices

The strengthening U.S. dollar has also exerted downward pressure on oil prices, as demand from buyers using other currencies declines. Consequently, these buyers must pay more for oil priced in dollars.

The dollar index hovered near a six-week high against major currencies on Wednesday due to the strengthening of investor expectations regarding the Federal Reserve’s reluctance to implement an immediate interest rate cut in light of the U.S. economy’s resilience.

Additionally, experts believe that the Middle East conflict will play a diminishing role in influencing oil price dynamics, and in the event of a de-escalation, the asset may even experience a sharp decline.

“We believe that without the current geopolitical tensions, oil prices will decline significantly,”

— said Vikas Dwivedi, global energy strategist at Macquarie, in a note.

“Barring any escalation in the Middle East, we think the oil price will remain within its current range in the first quarter of 2024.”