Last week saw major whipsaws in the price of Oil as investors weighed a deteriorating economic climate with risk premium from the Israel-Hammas war. Oil prices fell by over $2 per barrel on Thursday due to reduced concerns about a wider Middle East conflict and signs of weakening U.S. demand. This was quickly followed by a 2 dollar spike in Brent and WTI after Benjamin Netanyahu confirmed the imminent ground invasion of Gaza, which has now materialised.
The most recent increase in oil prices was driven by worries about potential disruptions to global crude supplies arising from the conflict between Israel and the Palestinian militant group Hamas, with concerns about the involvement of Iran and its regional allies. Amid these developments, the U.S. and other countries urged Israel to postpone a full-scale invasion of Gaza, which had been experiencing nearly three weeks of Israeli airstrikes triggered by an incident linked to Iranian-backed Hamas in southern Israel.
Additionally, concerns about the broader global economy also weighed on oil prices. U.S. Treasury yields were approaching 5% on Thursday, causing global stocks to reach multi-month lows. Data released on Thursday indicated that the U.S. economy had seen its fastest growth in nearly two years during the third quarter, raising expectations of prolonged high-interest rates by the Federal Reserve, and also indicating strong demand for Oil to sustain its growth.
The Week Ahead
All eyes this week will be on US-Iran relations as the US intensifies its determination to sanction Iran for what it sees to be direct support of Hammas. Iran has heightened rhetoric by stating that the war may ‘”force everyone to take action”. Spillover risks are certainly increasing and being reflected in market pricing, especially considering recent US bombardments of key Syrian targets and Israeli assaults on Lebanese Hezbollah targets.
Analysts remain mixed on the upcoming risks, with some citing that the conflict will remain localised to Israel Gaza and others fearing that spillover could lead to major oil supply disruptions, possible sending Oil to 100-110 US/bbl. if sanctions against Iranian Oil come into place.
Markets will also be watching the latest Federal Reserve comments on Wednesday this week, which will give some direction as to where potential rate hike activity in the US is going.