Oil prices surged more than 5% on Monday on rising geopolitical tensions in the Middle East. Rumors that Iran helped Hamas plan the attack added fuel to the fire. Iran denied the allegations by the way, but an escalation of tensions between Iran, Israel, and hence the US, could have severe consequences for global oil production as, despite restrictions, Iran could increase its exports and shoulder a part of the global production since the Ukrainian war, as Russian oil was banned, and the West had little choice to let someone sell its oil.
In August, Iran’s crude exports exceeded 1.4mbpd. It’s not much compared to the roughly 100 million barrel demand per day, but it makes up for some of OPEC’s production cuts for example, and it has a potential to export up to 3-4mbpd. Therefore, pushing Iran out of the picture could be a nightmare. And this is exactly why the US is now going toward other sanctioned countries to see if there is something that could be done. Reuters says that the US makes progress in talks with Venezuela to relief sanctions to allow at least one more foreign oil company to take Venezuelan oil under some conditions.
The reaction rally in oil is easing, with the barrel of crude settling around $86pb this morning. Brent crude remains offered near the 50-DMA, near $88pb level. Upside risks prevail.
Elsewhere
Safe haven assets and oil companies amassed important capital inflows on Monday. Exxon Mobil (NYSE:XOM) jumped 3.5% and a rally in oil stocks helped the British FTSE 100 limit gains in an otherwise depressive European trading session. Gold hit $1860 per ounce, as the US 10-year yield fell by a big chunk, around 18bp, on the back of increased inflows into the ten-year papers.
The 2-year yield slipped below the 5% mark. That was on the back of some dovish comments from Federal Reserve (Fed) members yesterday. Dallas Fed President Lorie Logan said that the recent rally in US long-term bond yields may mean that there’s less need for the Fed to tighten again.
The S&P 500 – which opened the week on a bearish note, rapidly recovered losses and closed the session 0.63% higher. Nasdaq advanced above the 100-DMA, but the European Stoxx 600 started the week on a bearish note. Besides the war news and the spike in oil prices, the news that Chinese spending during the Golden Week fell short of expectations, also hinted that they might buy less Louis Vuitton bags and Hermes scarfs – even with a cheaper euro.
In currencies, the US dollar gave back early gains, the EUR/USD stabilized between 1.0560 and 1.0580 while the USD/JPY eased to 148. More Fed members will be speaking today, and their comments could influence the intraday price moves in one way or the other.
It is true that the recent rise in US yields is soothing for the Fed, which is trying to tighten the financial conditions in an economy that just wouldn’t slow. European Central Bank (ECB) Chief Christine Lagarde said that the IMF cut its forecast for global growth, except for the US.
We will soon hear more details about new forecasts as the IMF and World Bank hold their annual meeting in Africa this week. Any weakness in global growth prospects could help take the air off the oil rally, while any upside revision for the US growth could help stocks recover if the dovish Fed expectations don’t get smashed by hawkish comments.