Reflecting on the Past

In the past week, the Middle East has experienced a surge in violence, adding further strain to the financial markets. While this recent volatility is concerning, it’s not entirely unexpected. Since October 1st, the price of crude oil has fluctuated dramatically, with lows hitting $84.30 per barrel and highs reaching $93.90 as of last Thursday.

On Wednesday, the United States eased sanctions on Venezuelan oil production by 25 percent. Currently, Venezuela produces approximately 800,000 barrels per day. This decision was influenced by the OPEC+ Cartel’s reduction in production, which has led to a significant decrease in the global flow of oil. As a result, prices of Brent Crude have risen by about 30% since reaching yearly lows in late June. It’s worth noting that the U.S. had imposed sanctions on Venezuelan oil in 2008 and again in 2017 under the Trump administration. With increased oil supply to the U.S , there are expectations of greater stability in oil prices, although the looming threat of prices reaching $100 per barrel remains a concern with far reaching geopolitical instability.

Looking Forward

As markets opened on Monday morning, Brent Crude was trading at $91.81 per barrel. This is in stark contrast to earlier forecasts, which had predicted a Q4 2023 price of $85 per barrel, as suggested by banks like JP Morgan earlier this year. This discrepancy is primarily due to traders’ unease, as they assess the possibility of Iran, a significant oil-producing nation, becoming involved in the Middle East conflict. An Iranian attack in support of Hamas against U.S.-backed Israel could trigger a series of events that would have severe economic implications for Iran.

In response to these developments, Ana Boata, the Head of Economic Research at Allianz Trade, has warned that the conflict might drive prices up to an astonishing $140 per barrel. This could result from a chain reaction of tightened market supply, influenced by OPEC constraints and a pressurized market environment. Saudi Arabia, for instance, has extended its production cuts of 1 million barrels per day through December. Additionally, potential sanctions on Iranian oil could be imposed if tensions with the U.S. escalate. All eyes are now closely monitoring the coming weeks events.

Regarding the UK, Tuesday will see the release of unemployment rate figures for the last three months by the Office for National Statistics. Analysts are hopeful that these figures will indicate a potential upturn for the economy. Moreover, Rishi Sunak’s government is considering tax cuts by the end of the year should the Prime Minister’s inflation targets for the end of 2023.