Markets started the week on a positive note as both the US and Iran paused mutual strikes and there was hope of restarted negotiations. Just days later, that seems to be a distant memory as crude prices are rocketing higher amid US air strikes across Iran. The question for every crude trader is whether Brent will once again rise to triple digits like it did earlier in the month.
The situation doesn’t just affect crude, as the dollar tends to strengthen amid geopolitical uncertainty. Higher crude prices are generally positive for the dollar (both the American and Canadian). But gold traders are also on alert as the yellow metal loses its gains from last week. Will gold break back below $4,000 per ounce?
Markets Seeing a Pattern
The reality is that while speculators jump into and out of crude amid the shifting situation in the Middle East, the market is growing increasingly used to the war. As time goes on, more alternatives to the Strait of Hormuz come on line and shipping routes are refined. Meaning that each time the situation re-escalates after an attempt at negotiations, crude doesn’t go as high as last time.
Though, there are some elements that push the other way. Global crude inventories have continued to fall as the war drags on. Last week, the US Strategic Petroleum Reserve (SPR) fell again to its lowest level since the early 1980s. Commercial inventories are falling as well. The EIA reported a 7.2 million drawdown on US crude stockpiles last week, with inventories falling to 7% below the seasonal average. This implies that supply is struggling as even a net exporter like the US is seeing dwinding commercial stockpiles.
Where Will Crude Go?
After the MOU and the partial temporary reopening of the Strait, brokerages revised their oil price forecast lower. Now that shipments are again suspended, those same brokerages are now hiking their price targets. Barclays recently precticed in a note to clients that Brent could rise as high as $150 by the end of the year.
However, they are still the outlier. The average of major analyst forecasts suggest a mean price target of just over $100 by the end of the current quarter. That represents an almost $10 increase over the current price, but lower than prior periods of the war.
Political Risk Add to the Trade
Political analysts suggest that there is little incentive to actually end the war in the near term. The upcoming US midterm elections are crucial with the war causing diminished popularity for Trump, and a potential Democratic sweep of Congress backed by anti-war sentiment. This would severely hamper the President’s plans to prosecute the war, providing motivation for Tehran to refuse compromise for the next several months. This could keep the war going until early November when the elections are held.
In the meantime, higher energy prices put upward pressure on interest rates and downward pressure on gold. If crude is going higher, then gold is likely going lower. However, the war does not respond to market forces; rather, it is the notoriously difficult-to-predict political climate. Peace overtures could tank crude prices for a while, but markets seem increasingly jaded by the conflict’s ups and downs.
