Oil prices rose for the second day in a row today, up about 0.2% for both major benchmarks, after reversing yesterday’s losses of more than 2% to gains of more than 3.5%.
The return of oil prices’ gains after the unprecedented geopolitical escalation by Iran, targeting Israel with hundreds of missiles, showed that concerns about the safety of global energy supplies may not seem exaggerated.
Up until yesterday, just before reports of an imminent Iranian attack, oil prices were falling sharply on concerns about the future of demand from China and the world in general, in light of the lackluster economic performance, in addition to the lack of pricing in geopolitical factors.
As we discussed yesterday, the geopolitical escalation in the Middle East does not seem likely to disrupt the flow of crude supplies until then, based on the assumption that Iran does not intend to push towards a wide regional war, which would have reinforced this assumption – this is what it has been saying continuously even after yesterday’s attack, unlike the highly escalatory Israeli statements and actions.
But after yesterday’s unprecedented attack and within the framework of the possible Israeli response, Israeli officials spoke to Axios about the possibility of targeting Iranian oil facilities. While Iran had accelerated the pace of crude production despite US sanctions, and its exports reached nearly 1.7 million barrels per day. In addition, Iran may resort to re-threatening to close the Strait of Hormuz and obstruct navigation in the Gulf of Oman if it feels that its interests may be attacked.
On the other hand, if these scenarios actually happen in the coming days or weeks, they may lead to higher oil prices and revive fears of a return to inflation. All of this will intersect with the start of the presidential race in the United States, and accordingly, the Joe Biden administration may try to pressure to prevent this type of escalation. Let’s not forget that the Biden administration is constantly accused of being indecisive in implementing sanctions on Iranian oil exports.
Therefore, the US administration may push to remove oil facilities and pipelines from the escalation equation for fear of bringing inflation back to the forefront. But the Israeli side – as usual – may ignore the declared desire of the United States and continue its escalation.
As for the economic side, the manufacturing sector witnessed further contraction in the United States last September, according to the ISM manufacturing PMI report. The sector showed continued signs of weak demand through the continued contraction in new orders, including export orders, in addition to the acceleration of the contraction in employment.
Jerome Powell also spoke on Monday about the future reduction in interest rates may not be at the same pace as we witnessed last September by half a percentage point. This in turn made the hypothesis of a 25-basis point reduction in the November meeting the most likely after the expected 50 basis point reduction was the most likely with a probability exceeding 60%, according to CME FedWatch Tool data.
