Last week, crude prices rose in anticipation of the weekend. Volatility rose quickly, hitting the highest level since the October 7 attack last year. But since trading started with the new week, the situation has been a bit anticlimactic, and now the question is whether it’s all downhill from here.
The driver that Israel declared was concerned about Israel striking back at Iran after the latter launched over 180 missiles at the former. In the past, such attacks, counterattacks and reprisals happened over the weekend. There had been talk of Israel potentially hitting Iranian oil production facilities, with US President Joe Biden first seeming to support the initiative and then saying he was against it. But the weekend passed without a strike, and now markets wonder when it will happen or if Israel will take more covert action.
The Fading War
The recent Iranian missile strike was a response to the assassination of senior Lebanese and Palestinian leaders by Israel. With no clear timeline for the conclusion of the Israel Defense Forces’ operations, concerns about potential escalation remain. However, the reprieve gives markets a chance to turn their attention to the data on crude fundamentals.
We have to remember that the latest spike higher is a move away from the downward trend of the last few months. In other words, if the latest concern around the Middle East were to be resolved, presumably, crude would resume its downward course. It seems that the market has concluded that demand will be weak, at least in the near term.
The Rising Economy
However, in the interim, there have been some changes in the economic dynamics. Two weeks ago, China announced a massive stimulus package. Before the market could digest the full effect of the measures, the Asian giant went on a week-long national holiday. On Tuesday, Chinese markets will reopen, and there will be updates on the latest economic data. If the stimulus were to take effect, then an improving economy in the world’s largest crude importer would likely sustain demand.
The other data point was Friday’s US NFP, which blew all expectations out of the water. The main takeaway was that the US economy is still resilient. While traders fretted that it meant the Fed was unlikely to cut rates as drastically as expected, a strong economy in the world’s largest crude consumer would likely also keep demand upbeat.
Keeping the Range
On the other hand, there is still doubt whether China’s stimulus plan will work. Also, NFP saw a drop in the response rate, which could mean the figures could be revised lower, as they were earlier in the year. However, that’s speculative. The data suggests that the demand for crude oil might be softer but likely not to decline as drastically as expected.
In conclusion, the acute spike in prices might be resolved if an enormous Israeli retaliation is not forthcoming. However, a return to the previous downward trend might not happen, either, as markets digest better economic data.
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