In a recent development that caught the attention of investors and market strategists alike, oil prices have seen a notable increase. The ongoing escalation of a crisis in the Middle East has prompted concerns about potential disruptions in the oil supply. On Thursday, oil prices sustained their upward momentum after a significant rise of a dollar per barrel in the previous session. The apprehensions revolve around Iran, the third-largest oil producer within OPEC, and the possibility of its deeper involvement in the crisis.
Brent crude futures saw a noticeable rise, going up by 30 cents, which amounts to a 0.3% increase, and reached $90.78 a barrel by 0325 GMT. Simultaneously, U.S. West Texas Intermediate crude futures also experienced growth, with an uptick of 25 cents or 0.3%, culminating in a price of $86.46 a barrel. This upward movement in both contracts comes after they had both risen by over 1% in the session prior. Market sentiment was influenced when news broke that three sons of a Hamas leader had been killed in an Israeli airstrike in Gaza. The incident has introduced new concerns that ceasefire talks, which had recently recommenced after more than six months of conflict, might face delays or complete disruption.
Market strategist Yeap Jun Rong from IG provided insights into the situation, stating, “Prices remain sensitive to geopolitical developments in the Middle East, with market participants pricing for the risks of supply disruptions if tensions were to drag for longer.” The precarious geopolitical dynamics have somewhat mitigated risk-off sentiments that prevailed overnight, as markets reassess their rate expectations. Most notably, there’s a growing anticipation that rate cuts by the U.S. Federal Reserve, previously expected as soon as June, may now be postponed until September. Yeap elaborated on the links between high rates and the oil market, mentioning that higher-for-longer rates could have the effect of dampening economic growth and thus reducing demand for oil.
The U.S. Federal Reserve’s minutes revealed officials’ concerns about inflation progress stalling. The analysis suggests that a more extended period of tight monetary policy might be required to bring inflation under control in the world’s largest economy. With the U.S inflation data coming in stronger than expected for the third consecutive time, the investors’ likelihood of a rate cut has shifted towards September.
Regarding the tension in the Middle East, the region remains on high alert for potential Iranian retaliation following a suspected Israeli airstrike targeting Iran’s embassy in Syria at the start of the month. A Bloomberg report indicated that the U.S. and allies are bracing for imminent major missile or drone strikes by Iran or its proxies against Israel.
In a reinforcing gesture of international alliances, U.S. Secretary of State Antony Blinken assured Israeli Defense Minister Yoav Gallant of the United States’ support against threats posed by Iran, according to a later announcement by the U.S. State Department.
“The market has become increasingly concerned that the Israel-Hamas war could escalate across the Middle East, putting oil supply at risk,” noted ANZ analyst Daniel Hynes, highlighting the geopolitical risks that are currently at the forefront of traders’ minds.
Looking forward, oil traders are also anticipating the release of a monthly oil market report from the Organization of the Petroleum Exporting Countries (OPEC) later on Thursday. Additionally, the International Energy Agency’s oil market report is due on Friday, which will provide further data and analysis that could impact the market.
The evolving situation underscores the intricate relationship between global politics and commodity prices, particularly in regions with significant influence over the world’s oil supply. As the Middle East crisis unfolds, the oil market is likely to remain sensitive to any developments, maintaining a cautious stance amidst an uncertain geopolitical landscape.
