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Commodities Week Ahead: Mideast Crisis a Reset for Oil, Gold Bulls

By Investing.com (Barani Krishnan)CommoditiesOct 09, 2023 03:56AM ET
www.investing.com/analysis/commodities-week-ahead-mideast-crisis-a-reset-for-oil-gold-bulls-200642495
Commodities Week Ahead: Mideast Crisis a Reset for Oil, Gold Bulls
By Investing.com (Barani Krishnan)   |  Oct 09, 2023 03:56AM ET
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  • Oil jumps 4% at Monday’s start after last week’s loss of 9% to 11%
  • Gold up 1% after last week’s 7-month low
  • While Mideast crisis makes oil prices higher in the immediate term, more output/exports must be lost for rally to continue

Just on Friday, oil and gold longs would have retired for the weekend expecting more downside from a global macro trade that had given them the thumbs-down.

What a difference 24 hours can make.

The same bulls in crude and bullion would feel they have entered a new world on Monday as oil jumped as much as 4% in Asian trading — it rarely moves beyond half a percent in that session — and gold exceeded usual gains too, with a 1% rally, after Saturday’s dramatic attack by the Palestinian terrorist group Hamas on Israel.

John Kilduff, a partner at New York energy hedge fund Again Capital, who has spent two decades analyzing the impact of Middle East geopolitical strife on oil, likened the crisis to the “reset” sought by those hoping for a game changer in the two assets, after a woeful start in October trading.

Without More Supply/Exports Lost, Oil Prices Might Not Benefit Too Much

“How much” of a boon the crisis will be in pushing prices higher — particularly those of oil — will be determined by how severely affected crude production and exports are by this; i.e. how many barrels are we talking about, and how those stack up on the already squeezed global supply situation for oil from OPEC+ output cuts, said Kilduff. He adds: 

“Firstly, for those who wanted a market reset, this is it. This is a multifarious crisis with so many angles that it’s virtually impossible to find a solution quickly and there’s no one fix for it. For perspective, it’s like a scaled-down version of 9/11 that promises to drag on in terms of impact, while spinning multiple subplots. And oil and gold, as leading commodities in the macro trade, thrive on such subplots.”

“But while there’s a huge immediate shock value, as well as durability and elasticity, in this crisis, what will matter in the end is the actual impact on oil supply, not implied.

Are the Iranians without doubt the sponsors of this attack, and if so, will the war vowed by Israel end up severely debilitating Iran’s oil shipments? Also, will the US, after a long period of scant sanctions enforcement against Tehran’s oil, double down as well? If these things don’t happen the oil price could come back down.

And without the heat of high oil prices, gold might find difficulty reaching new highs too, despite the geopolitical premium it is supposed to reflect.” 

Vivek Dhar, an analyst at Commonwealth Bank of Australia, had a similar view, saying:

"For this conflict to have a lasting and meaningful impact on oil markets, there must be a sustained reduction in oil supply or transport. If Western countries officially link Iranian intelligence to the Hamas attack, then Iran’s oil supply and exports face imminent downside risks," Dhar said.

In Singapore’s late afternoon trade, New York-traded West Texas Intermediate, or WTI, crude for delivery in November was up $2.99, or 3.6%, registering a trade of $85.78 per barrel by 15:00 local (03:00 Eastern US). The US crude benchmark rose to as high as $87.23 earlier, rallying 4%.

London-traded Brent for the most-active December contract was up $2.73, or 3.2%, at $87.31. The session high was $89 — just a dollar short of bringing the global crude benchmark back to the key bullish mark of $90 per barrel. 

In gold, the most-active futures contract on New York’s Comex, December, was up $17.55, or 1%, to $1,862.71 an ounce. The spot price of gold, more closely watched by some traders than futures, was up $16.57, or 0.9%, to $1,855.51.

Gold hit 7-month lows last week, with futures reaching $1,859.55, while the spot price tumbled to $1,810.47.

Oil hit more than one-year highs at $95 for WTI and $97 for Brent before tumbling on a backdrop of macro and economic factors as as US Treasury yields hit 16-year highs and the dollar 10-month peak while while consumption of gasoline — the No. 1 fuel product in the United States — fell at a seasonal low of 25 years. 

In actual losses, US crude fell 9% last week and Brent 11%, the biggest weekly slump since March and was deeper than any weekly rally over the past three months.

Saudis the Dark Horse in This Crisis

Fresh eruption of violence in the Middle East threatens to derail US efforts to broker a rapprochement between Saudi Arabia and Israel, in which the kingdom would normalize ties with Israel in return for a defense deal between Washington and Riyadh. Saudi officials had reportedly told the White House on Friday that they were willing to raise output next year as part of the proposed Israel deal.

An increase in Saudi output would have helped to relieve supply tightness after months of supply cuts from key producers Saudi Arabia and Russia. A normalization of Saudi-Israeli relations would likely freeze recent moves toward detente between Saudi Arabia and Iran.

In reality, the Saudis are another interesting dark horse in this crisis. In ordinary times, when world oil supply is at a dire shortage, the Saudis will be the ones to rescue it, given their standing as the nation with the highest capacity to produce more. 

But the Saudis have become the main driver of the supply squeeze in oil now, carrying out some of the deepest production cuts ever in the history of the kingdom, ostensibly to get $100 or more for a barrel. 

They almost got there two weeks ago, when global crude benchmark Brent went above $97. Thus, the selloff in the just-ended week must have incensed the Saudis to no end and they are hardly likely to add even a barrel after this as relief to any new supply squeeze related to reprisals from this war.

As of Monday, OPEC+ production cuts looked set to continue with no change, Saudi Energy Minister Abdulaziz bin Salman said on the sidelines of a climate conference in Riyadh. 

“Yes, we may be delayed with a decision on what to do, but I would not forfeit the precautionary approach, even if it goes beyond a month or two, or three or four months, or five months,” Abdulaziz said. 

“I honestly believe that the best thing I could say is that the cohesion of OPEC+ should not be challenged. We’ve been through the worst, I don’t think we will have to go through any terrible situation at all,” he added.

And while President Biden’s top aides reaffirmed on Sunday their commitment to a Saudi-Israel normalization and diplomatic deal, there was no signs anyone was biting on the deal. Israel, on the other hand, prepared for the start of a full-scale war against Palestinian militants.

As aforementioned, how deep an impact it would have on oil prices is not known. But with the showdown itself being in the super-sensitive zone which is central to oil production, an intelligent guess is that prices would be higher in the immediate days as the trade tries to figure out if supply would indeed be affected and to what extent.

All Eyes on Iran

In that analysis, all attention would be on Iran, which is tacitly behind Hamas at all times, good or bad. 

Despite its weakened finances in recent years due to US sanctions, Iran remains the Middle East’s third largest economy, after Turkey and Saudi Arabia. More importantly, it is the world’s fifth largest oil producer. 

With the Israelis vowing commensurate response for one of the worst attacks ever on their soil, a counter engagement against Tehran, either unilaterally by Jerusalem, or with the combined might of the United States, could have ramifications for the oil trade.  

As Bloomberg’s oil columnist Javier Blas pointed in the immediate hours after the Hamas attack, the most immediate impact could come if Israel concludes that Hamas acted on instructions of Tehran. He referenced the 2019 attack on Saudi facilities, where a chunk of the country’s oil production capacity was taken out by Yemenis whom many suspect were guided from beginning to end by Iran.

“Even if Israel doesn’t immediately respond to Iran, the repercussions will likely affect Iranian oil production,” Blas wrote. “Since late 2022, Washington has turned a blind eye to surging Iranian oil exports, bypassing American sanctions. The priority in Washington was an informal détente with Tehran.” 

“As a result, Iranian oil output has surged nearly 700,000 barrels a day this year – the second-largest source of incremental supply in 2023, behind only US shale. The White House is now likely to enforce the sanctions.”

Last but not least, President Joe Biden could again turn to the US oil reserve if the supply situation got too tight to the extent that prices shot way above $100, Blas saud.  

Stockpiles in the US Strategic Petroleum Reserve are already at their lowest since the 1980s after the president released some 200 million barrels over the past two years to plug shortages which drove pump prices of gasoline to record highs of $5 last summer. “The reserve still has enough oil to deal with another crisis,” Blas said.

In conclusion, I’ll say that geopolitics tends to have an intense and outsized impact on anything, but its effect is also typically shorter and less pronounced than that caused by the economy. While the war declared by Israel would most likely push crude prices up in the immediate term, it’s hard to see how it would continue doing so unless it provably intensifies the squeeze being put on oil by OPEC+.

Our thoughts and prayers are with our friends, colleagues, and their families in Israel during these difficult and sad times.

***

Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

Commodities Week Ahead: Mideast Crisis a Reset for Oil, Gold Bulls
 

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Commodities Week Ahead: Mideast Crisis a Reset for Oil, Gold Bulls

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Comments (14)
OBiwan Kenobi
OBiwan Kenobi Oct 09, 2023 2:39PM ET
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No way to know exactly what happened and how it will play out...that is until Hollywood makes the movie.
Manfred Kruger
Manfred Kruger Oct 09, 2023 1:13PM ET
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There is little doubt that Iran is behind the recent invasion. What is in doubt is how far Israel will go in its military response.
Alan Je
Alan Je Oct 09, 2023 12:58PM ET
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Great article.  From what I viewed, oil prices should blip up then settle down unlike the 1970's situation as an adjustment to supply-demand dynamics.  Perhaps be adventurous and similar to the gold/metals complex too (although I'm a hidden semi-gold bull long term).
Casador Del Oso
Casador Del Oso Oct 09, 2023 10:54AM ET
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Excellent article.
Andrew Ulferts
Andrew Ulferts Oct 09, 2023 8:38AM ET
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Thanks Barani.
Barani Krishnan
Barani Krishnan Oct 09, 2023 8:38AM ET
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You're most welcome, Andrew. Let's see how this thing develops.
Mukund Jivraj
Mukund Jivraj Oct 09, 2023 8:34AM ET
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Haha last article predicted Gold $1700...
Barani Krishnan
Barani Krishnan Oct 09, 2023 8:34AM ET
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Did you plan this attack to know what was going to happen?
Raphael Klomegah
Raphael Klomegah Oct 09, 2023 7:11AM ET
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I need help from you people
Aku Khusoh
Aku Khusoh Oct 09, 2023 7:08AM ET
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I need help from u guys
Hansome Kelly
Hansome Kelly Oct 09, 2023 6:54AM ET
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Greatly said
Barani Krishnan
Barani Krishnan Oct 09, 2023 6:54AM ET
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Thanks for reading.
Steven Grose
Steven Grose Oct 09, 2023 6:53AM ET
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With the Democrats view and treatment of Saudi Arabia, expect to see oil squeeze every time Democrats take Presidential office.
 
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