Key takeaways
- Oil prices have steadily risen since the summer after the OPEC cut its supply
- New attacks in the Palestinian-Israeli conflict over the weekend sent oil prices spiking again
- The prices have retreated slightly, and the stock market rose after news emerged that Israel had taken control of Hamas-controlled towns
Oil prices have been in flux of late, as a summer price boom caused by seasonal adjustments and a global supply and demand issue has finally begun to wane. It’s been a shocking weekend of developments in the Israel-Palestine conflict as the world witnessed the deadliest attack on Israel in decades.
This has sparked fresh oil price increases as the markets sound out what this latest attack means and whether it’s a short-term price rally or if a sustained war between the two countries will cause oil supply issues.
Here’s the latest on what’s been driving oil prices of late and whether this latest declaration of war from Israel on Hamas fighters will add more turmoil to the global oil markets. Keep reading.
What’s been going on with oil prices lately?
Oil prices have been a concern ever since the Russia-Ukraine conflict first emerged and sanctions were placed on key oil exporter Russia, which caused oil prices to spike. Brent crude oil prices hit an eight-year high in March 2022 at $140. But 12 months later, these prices had retreated by 40% as Russian exports were redirected to South and East Asia, while Europe relied more on the Middle East and Asia for its oil.
That hasn’t made supply and demand any easier. The International Energy Agency (IEA) estimated that global oil consumption hit an all-time high of `03 million barrels daily in June. At the same time, there’s already a global supply shortage: Cushing in Oklahoma is a key oil producer in the U.S., but it only has 22 million barrels of oil in stores – the lowest level since 2014.
It doesn’t help that the Organization of the Petroleum Exporting Companies (OPEC) confirmed in the summer it would be cutting oil production by a million barrels a day to prop up falling oil prices. Even though oil futures climbed throughout September, OPEC has decided to continue its cut until the end of the year.
What happened with oil prices over the weekend?
To complicate things further, a new chapter in the Israeli-Palestinian conflict began over the weekend after the Palestinian terrorist group Hamas initiated an attack on Israel. Considered the worst attack in decades on Israel, the move prompted retaliation from the country and a declaration of war on Hamas.
The fresh conflict could potentially threaten the Middle Eastern oil supply, causing oil prices to surge. It all depends on how the world powers could respond to Iran, which Israel claims was involved in the attacks, but Iran has pleaded its innocence. Should the tensions worsen, Iran could disrupt oil exports in the Strait of Hormuz, which is responsible for 15-20% of the world’s oil flowing through it.
Another factor is the U.S. and Saudi Arabia’s reaction to Iran’s potential involvement in the attacks. President Biden had relaxed sanctions in Iran in a bid to broker peace in the Middle East. Iran’s crude exports rose from 1.35 million barrels per day in April to a high of 1.79 million in August, helping to keep up supply amid the Russia conflict and OPEC cutting its supply. Now, all of that is up in the air as the situation unfolds.
Continuous-contract futures for the U.S. benchmark West Texas Intermediate crude oil gained 4% on Monday to reach over $86 a barrel. Brent crude oil, the international standard, climbed to as much as $88.60 but has since dropped back slightly to just over $88.
How have the stock markets reacted?
The stock market initially opened lower but ended Monday trading higher after Israel successfully took over towns controlled by Hamas. The S&P 500 gained 0.6%, as did the Dow Jones Industrial Average, while the Nasdaq Composite added 0.4% to its value.
Delta Airlines, American Airlines and United Airlines all lost over 4% off of their stock prices as news of the conflict emerged, with flights to and from Israel halted and fears that higher oil prices could impact the sector.
The big oil and gas conglomerates all saw their share prices rise on Monday. Exxon rose by 3.5%, Chevron gained 2.77%, Occidental Petroleum climbed by 4.5%, and ConocoPhillips rose by 5.6%. Overall, the S&P 50’s energy sector gained 3.5% on Monday.
Defense stocks were another winner from Monday’s trading session. Lockheed Martin gained 8.9%, while Northrop Grumman added 11% during the trading day, marking their best performance since 2020.
Oil prices have eased slightly on Tuesday, with Brent Crude and West Texas Intermediate falling 36 cents and 35 cents, respectively.
What’s the implication on future interest rates?
Oil prices going up is a double-edged sword right now. On the one hand, a sustained increase in oil prices will impact headline inflation, most likely pushing the figure higher than normal and making the Fed’s job more difficult.
On the other hand, higher oil prices will further limit consumers’ disposable income and impact businesses’ bottom lines, which could actually help with keeping inflation in check. There hasn’t been an immediate impact at the pumps, with average gas prices currently at $3.70 per gallon, down 11 cents in the last week.
It’s far too early to tell the true impact, but the markets seem confident that the Fed won’t want to raise interest rates while flux over oil prices is now happening. The Fed fund futures are now at just a 14% chance of interest rates rising in November and only 24% in December for a quarter-point hike.
What’s more is that Patrick DeHaan, head of petroleum analysis at GasBuddy, posted on X (formerly known as Twitter) that gas prices are likely to continue on a downward trend. “For now, oil in the short term may hold into the $80s, but until the national average drops into the $3.30s, we’re at very very low risk of any upward move in gasoline prices,” he said.
Red-hot jobs data spooked the markets, but dovish comments from Fed officials on Monday have helped to allay concerns. “We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive,” Fed Vice Chair Philip Jefferson said, noting the rapidly rising yields on bonds that are hitting multi-year highs could act in place of monetary tightening from the central bank.
The bottom line
Oil prices rose over the weekend, but given they’re already pulling back – and are still well below the spike caused by the Russian-Ukrainian conflict in February 2022 – it’s a sign the markets think the latest development in the Israeli-Palestinian conflict will be short-lived.
There’s no telling right now how the situation will continue to develop, but with many world powers trying to broker peace at the moment, the signs point to oil prices stabilising once more and not giving the Fed too much trouble in the battle against inflation. But it can change in the blink of an eye, so watch this space.
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