Oil investors watchful as global tensions spark rising fears and prices

Brent crude hovered near $78 a barrel, building on Tuesday’s modest gains, after the Bank of Japan stepped in to calm markets following significant volatility driven by unwinding currency carry trades.

Geopolitical risks are at the forefront of traders' minds. In the Middle East, there's concern over a possible Iranian strike on Israel in retaliation for the killings of Hezbollah and Hamas leaders. Simultaneously, Ukrainian forces launched an unusual cross-border attack into Russia, adding to the geopolitical tension.

Despite these concerns, oil faces challenges from weakening demand in China and the US, as well as potential increased supply from the OPEC+ alliance in the next quarter. Any escalation in the Middle East could push prices higher, but a lasting price hike would require a significant disruption to crude output in the region.

Tamas Varga, an analyst at PVM Oil Associates Ltd., remarked, “Those who firmly believe that economic contraction is inevitable will be happy to desert equities and commodities in the foreseeable future. But the rest, and they are probably the majority, will be reluctant to do so unless genuine signs of recession emerge.”

China’s oil imports fell to their lowest level in almost two years last month, raising concerns about declining demand. In the US, industry reports indicated a slight increase in crude inventories following five consecutive weeks of declines and a significant rise in gasoline stockpiles. Official US government data is expected on Wednesday.