In a fluctuating market, oil prices experienced a decline on Thursday as traders carefully evaluated the ongoing conflict in the Middle East. Additionally, an unexpectedly robust economic performance in the United States has indicated that the Federal Reserve is likely to maintain its trajectory of elevated interest rates for an extended period.
During midday trading, Brent crude (BZ=F) witnessed a drop of over 1%, trading above $88 per barrel. Simultaneously, West Texas Intermediate (CL=F) also experienced a decline of up to 3% earlier in the session, before recovering slightly and stabilizing at around $84 per barrel.
These shifts follow the release of data on Wednesday, revealing that the US economy expanded at an annualized rate of 4.9% in the previous quarter, surpassing the Federal Reserve’s projections. This has heightened market expectations that interest rates will remain elevated for an extended duration.
Quincy Krosby, Chief Global Strategist for LPL Financial, emphasized, “The Fed’s job isn’t done.” Krosby suggested that while the market isn’t anticipating a rate hike at the upcoming Federal Reserve meeting, there are concerns that the Fed may indicate a need for further rate increases before the year’s end if inflation doesn’t subside at a faster pace and if the economy continues to outperform initial predictions.
Thursday also witnessed a surge in the US dollar index (DX-Y), which, coupled with the robust economic data, exerted pressure on crude prices and the broader financial markets. Notably, oil is priced in dollars.
Contributing to the decline in crude prices is a waning belief in the market that the conflict between Israel and Hamas may escalate further. Ongoing diplomatic endeavors in the region aim to postpone an anticipated ground invasion of Gaza, prompting traders to swiftly reduce their exposure to riskier assets in response to the news.
Earlier this month, oil experienced a rapid surge in the wake of Hamas’ unexpected attack on Israel, with both Brent and West Texas Intermediate rising by over 4% due to heightened market apprehensions. Tamar Essner, Principal at Vectis Energy Partners, noted, “The market has been fading the geopolitical risk and trending lower.” Essner explained that the market’s relative calm in response to recent events in Israel stems from the considerable surplus capacity available.
A primary concern for crude traders now centers on the potential for the Biden administration to impose sanctions on Iranian oil. However, Essner indicated that this could be more rhetoric than actual impact, given that the majority of Iranian crude is directed towards China in non-dollarized trade.
Data from the Energy Information Administration (EIA) released on Wednesday disclosed a surprise increase in US stockpiles by 1.372 million barrels last week, contrary to analysts’ expectations of a gain of approximately 240,000 barrels.
In conclusion, the current decline in oil prices reflects a complex interplay of factors, including the Middle East conflict and the surprising strength of the US economy, creating an uncertain landscape for traders and investors.
Source: Yahoo Finance
