Crude prices are under increasing pressure as the People’s Bank of China has not cut interest rates, especially given the lackluster performance of the economy and the Fed’s aggressive 0.5% cut this week. This negative factor is combining with the unprecedentedly heightened geopolitical tensions in the Middle East and growing warnings of a wider regional war from regional analysts and the US Department of Defense.
While China keeping one- and five-year loan prime rates unchanged was not unexpected, it was necessary to support sluggish economic growth. This appears to have put downward pressure on oil prices as concerns remain over the future of demand for crude from the world’s largest importer.
In contrast, along with optimism about further interest rate cuts by the Federal Reserve this year, geopolitical factors from the Middle East are providing support for oil prices and may help stop the repeated downward correction.
“There are increasing signs of the inevitability of a multi-front regional war in the Middle East, the boundaries of which we will not know, and, in my opinion, it is not unlikely that if it gets out of control it will disrupt crude supplies from the region – although this is unlikely according to many analysts and the markets,” said Samer Hassan, a senior analyst with CFD broker XS.com in Dubai.
A large-scale war between Hezbollah and Israel seems inevitable, according to The Washington Post. The Wall Street Journal has also reported warnings from the US Secretary of Defense Lloyd Austin and other officials about the approach of an Israeli ground attack in Lebanon. Austin also postponed a trip scheduled for next week to Israel in light of the escalation, according to Axios.
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All this comes with the impossibility of reaching a ceasefire in Gaza that would ward off the specter of a large-scale regional war.
US administration officials told the Wall Street Journal that they do not expect an agreement to be reached during the remainder of Joe Biden’s presidency, and said that no agreement is inevitable – contrary to the statements made by Biden and his Secretary of State during previous rounds of negotiations. An Arab official also told The Journal that there is no chance of reaching an agreement.
Fed cut brings volatility to energy markets
Crude oil was another market which saw an uptick in volatility following the Fed’s rate announcement this week. Yet its price swings weren’t as wild as those seen in stock indices, FX and precious metals.
Despite this, the overall shape of the moves echoed those of other markets. Crude oil rallied initially before giving back all its gains, and more, then finding a floor before steadily making gains into the European trading session. Early this morning, front-month WTI briefly pushed above $71, hitting its highest level in over a fortnight. This represents a rally of nearly 10% off last week’s low.
“While prices remain over 15% below the July high, this is a significant move,” said David Morrison, an analyst with Trade Nation. “Could this signal that oil has finally found a bottom following the near-relentless sell-off over the last ten weeks? It’s certainly possible.”
Much will depend on the size and strength of the next pull-back. If it’s relatively modest and falls significantly short of last week’s $64.80 low, then that would certainly increase the probability that the low is in. Otherwise, then there’s an increased likelihood of another lower low before oil can find support. “Wednesday’s rate cut should help to boost economic activity,” Morrison said. “But as pivotal as the US economy is, it’s China that remains the focus for oil traders.”
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