Crude oil returns to decline today across both major benchmarks, Brent and WTI, by approximately 0.3%, after yesterday’s gains.
While crude prices are still slightly higher than the lowest levels two months ago.
The pressure on oil continues today as OPEC did not change its demand and supply growth forecasts, in addition to the higher-than-expected acceleration in wage growth in Britain and the highest levels of confidence in the Eurozone and German economies in more than two years, according to the ZEW Economic Sentiment Index.
Today we witnessed the monthly report from the Organization of Petroleum Exporting Countries (OPEC), which did not bring anything new regarding future expectations for this year and next year and maintaining previous expectations.
While the report mentioned of a decline in institutional investor sentiment towards the future of oil prices during the second half of last April and a reduction in their long positions as geopolitical concerns receded.
Earlier today, while the data we have seen from Europe indicate the strength of these economies, they may at the same time reinforce the hypothesis of keeping interest rates higher for longer period than expected, in other words weak prospects for oil demand growth.
While we find this narrative more clearly in the United States after expectations about the possibility rate cuts have shifted, from June to September at least, in light of the acceleration of inflation, driven by strong economic activity.
Also, we saw comments from Federal Reserve Chairman, Philip Jefferson, who expressed the central bank’s concern about the trend in inflation, which is fueled by a strong labor market and which may prompt relief about keeping current rates high for a longer period.
Yesterday as well we also saw the largest daily gain this year for the ICE BofAML US Index. Bond Market Option Volatility Estimate Index (MOVE), which measures the level of uncertainty investors have in the Treasury bond market, at 11.8%.
This state of uncertainty comes from the fear of a shift in the course of the money markets, which in turn may be the result of another possible shift that may occur in interest rate expectations, and this turmoil, I believe, may find its way to the energy markets, which are naturally affected by the shift in the monetary landscape.
This also comes with the anticipation of inflation data from the United States, whether through the producer and consumer price index readings today and tomorrow, which will help clarify the vision about the current path of price growth.
As for today’s data, we witnessed the continuation of high levels of wage growth in Britain at 5.7% in the three months ending last March for the Average Earnings Index, which was contrary to expectations that it would slow to 5.3%.
In the Eurozone, we also saw better than expected readings of the ZEW Economic Sentiment Index at 47 for both Germany and the Eurozone, which represents the highest levels since February of 2022. While optimism about the future of growth in the Eurozone and China, as Germany’s largest trading partners, is what has contributed to this high levels of confidence of the latter, according to ZEW.
With all this said, I see that geopolitical tensions in the Middle East appear to be out of focus for markets as broad regional war fears recede to the lowest levels since their recent peak.
While we have witnessed reports of the deterioration of Egyptian-Israeli relations as a result of the recent military escalation at the Palestinian Rafah crossing adjacent to the Egyptian border. However, I believe that the talk and reports that the development of recent events may ultimately tear apart the decades-long state of peace and push towards war is an extremely exaggerated and unrealistic hypothesis, due to considerations that go back to both countries.
