In a significant development, oil prices saw a decline on Thursday, influenced by a combination of factors including ongoing tensions in the Middle East and a robust economic performance in the United States, which has led to expectations of sustained higher interest rates by the Federal Reserve.
During midday trading, Brent (BZ=F) experienced a drop of over 1%, settling above $88 per barrel. Simultaneously, West Texas Intermediate (CL=F) also witnessed a decline of up to 3% in the session, eventually recovering some losses and stabilizing around $84 per barrel.
This decline in oil prices follows Wednesday’s release of data indicating a 4.9% annualized growth in the US economy for the last quarter, surpassing the Federal Reserve’s projections. This has strengthened the market’s anticipation of a prolonged period of elevated interest rates. Quincy Krosby, Chief Global Strategist for LPL Financial, emphasized, “The Fed’s job isn’t done,” cautioning that there are concerns over the possibility of further rate hikes this year if inflation persists and the economy defies expectations of a slowdown.
Additionally, Thursday witnessed an upswing in the US dollar index (DX-Y), a development that, in conjunction with robust economic data, exerted pressure on crude prices and broader markets. It is worth noting that oil is denominated in dollars.
The diminishing assumption in the market that the conflict between Israel and Hamas may escalate further also contributed to the sell-off in crude. Ongoing diplomatic efforts in the region aim to forestall an anticipated ground invasion of Gaza, prompting traders to reduce exposure to riskier assets. Earlier this month, oil experienced a surge following a surprise attack by Hamas on Israel, resulting in both Brent and WTI surging by more than 4%.
Tamar Essner, Principal at Vectis Energy Partners, highlighted the market’s evolving stance on geopolitical risk, noting, “The market has been fading the geopolitical risk and trending lower.” She attributed this complacency to a significant surplus capacity in the market.
A primary concern for crude traders now centers around potential sanctions on Iranian oil by the Biden administration. However, it is suggested that the impact may be less severe than anticipated due to the majority of Iranian crude being directed towards China in non-dollarized trade.
Furthermore, recent data from the Energy Information Administration (EIA) revealed a surprise increase of 1.372 million barrels in US stockpiles last week, contrary to analyst expectations of a gain of about 240,000 barrels.
In conclusion, the recent decline in oil prices reflects a delicate balancing act in the market, with factors such as the Middle East conflict and robust US economic output contributing to this decline.
Source: Yahoo Finance
