Oil benchmarks moved upward in Asian trading on Wednesday as investors sought clearer signals on the trajectory of relations between the United States and Iran, and turned attention to fuel demand tied to a major Chinese holiday.
Markets reversed some of Tuesday's losses as a subdued dollar and the prospect of upcoming key U.S. economic releases lent additional support to crude. By 21:04 ET (02:04 GMT), Brent futures for April were trading 0.6% higher at $69.18 a barrel, while West Texas Intermediate futures were up 0.6% at $64.19 a barrel.
Geopolitical uncertainty between Washington and Tehran contributed to a risk premium being priced into oil, on concerns that military escalation could interrupt Iranian crude flows. Iranian officials said on Tuesday that recent nuclear talks with the U.S. had allowed Tehran to assess Washington's seriousness and that diplomatic engagement was set to continue. Those comments followed talks held last week over Tehran's nuclear program, which occurred after U.S. President Donald Trump deployed several warships to the Middle East.
Although both Iran and the U.S. described some progress from their weekend discussions, those statements were overshadowed by a U.S. warning for vessels transiting the Strait of Hormuz. Reports also indicated that President Trump was considering the deployment of a second aircraft carrier near Iran - a prospect market participants said could significantly heighten tensions in the region.
Traders reacted by incorporating a degree of supply-risk premium into crude prices, reflecting the possibility that military action might disrupt oil shipments from Iran.
At the same time, expectations of stronger fuel consumption in China provided additional underpinning to prices. Market attention has shifted to the Lunar New Year holiday, which this year - the Year of the Horse in the Chinese zodiac - falls on February 17. Chinese authorities have declared a nine-day public holiday from February 15 to 23, longer than is typical.
The Lunar New Year period traditionally triggers elevated consumer spending and substantial travel within and out of China. Chinese officials said they expect a record 9.5 billion passenger trips during the spring holiday, a figure that market participants view as potentially supportive of gasoline and jet fuel demand.
Outbound travel from China is expected to include a number of popular destinations across Southeast Asia, though flights to Japan were projected to decline sharply amid a bitter diplomatic spat between Tokyo and Beijing.
At the same time, recent Chinese economic data pointed to a continuing deflationary trend: consumer price index inflation missed market expectations, while producer prices remained in contraction. Those data underscore mixed demand signals for energy consumption in China even as holiday travel may temporarily raise fuel use.
Implications for markets
- Energy markets are weighing the balance between a supply-risk premium related to Middle East tensions and potentially stronger near-term fuel demand from China.
- Shipping and maritime insurance costs could be sensitive to elevated warnings for transit in the Strait of Hormuz.
- Airline and travel sectors may see demand shifts depending on patterns of outbound Chinese travel and diplomatic impacts on routes such as those to Japan.
Prices and sentiment will likely remain responsive to developments on both diplomatic and economic fronts: updates on U.S.-Iran interactions, any changes to naval deployments, and further Chinese demand indicators and holiday travel statistics.