Oil prices eased off the volatility seen since the beginning of this week and on morning.
The uncertainty surrounding the nature of the Israeli response to the Iranian attack and the counter-response and their consequences is the main concern for energy markets. Markets are also awaiting the arrival of the Category 5 Hurricane Milton to the coast of Florida at dawn tomorrow to assess the extent of the damage it may cause to energy facilities.
In the United States, Hurricane Milton is expected to reach Florida at around 2 a.m. on Thursday. With the arrival of the strongest hurricane to hit Tampa Bay in a century, the largest evacuation of residents since 2017 has been carried out. The path of the hurricane may also intersect with oil and natural gas facilities and pipelines, which has led to widespread shutdowns, according to S&P Global.
In the Middle East, US President Joe Biden is expected to hold a phone call with Israeli Prime Minister Benjamin Netanyahu to discuss a plan to respond to last week’s unprecedented Iranian attack, officials told Axios. Netanyahu held intensive meetings yesterday to discuss the timing and scope of the response, officials said. Accordingly, I think that such an attack may not be far off.
According to the Wall Street Journal, Israel has thus far withheld details of the attack from the U.S. administration, causing frustration among American officials. The US has urged that no nuclear or oil facilities be targeted to avoid escalating the regional war.
I think that the deliberate lack of coordination by Israel may reflect its intention to strike targets that the US does not want. Where a regional military escalation could send energy prices soaring just days before the US elections.
The lack of US-Israeli coordination could worry markets because it reinforces the hypothesis that the aforementioned targets will be struck. While Israel cannot effectively target nuclear facilities that are fortified in mountains, striking oil facilities seems more likely.
With Netanyahu in such a difficult situation as a result of Tel Aviv being directly hit by Iranian missiles and stumbling on the southern Lebanese front, he may resort to more escalatory steps towards a regional war.
In light of this situation, attacks that would only send a message to the Iranian side are out of the question, as former Prime Minister Naftali Bennett says that “the time for messages is over” and therefore further escalation is now more likely.
I also believe that the possibility of a ceasefire that would lead to calm in either Lebanon or Gaza is unlikely now, as even before the previous embarrassing factors for the Prime Minister, the far-right alliance that guaranteed Netanyahu’s continued rule threatened to topple the government if the war were stopped, but now they will be more committed to their positions regardless of the consequences.
On the economic front, markets are also awaiting the US oil inventory figures for last week and the minutes of the previous Federal Open Market Committee meeting. In addition, the US Consumer Price Index reading for September is expected to slow to 2.3%.
While a higher-than-expected reading for inflation figures would give the Fed more comfort to cut interest rates this year at a slower pace than markets had expected after the last cut. However, a cut of more than half a percentage point is unlikely to be achieved by the end of this year, according to CME FedWatch Tool figures.
Last week’s very positive labor market figures and the possibility of energy prices rebounding could dampen hopes of an accelerated rate cut, keeping pressure on oil prices.
