Crude oil futures for NYMEX West Texas Intermediate and ICE Brent are down more than 1%, following a decline of around 2% in both main benchmarks.
The fragility of the upward momentum in oil prices comes amid what seems to be the market clinging to the hypothesis that the war in the Middle East cannot last long, despite the sudden return of escalation and the collapse of the ceasefire this week.
Both the United States and Iran have frequently exchanged attacks since the beginning of the week, hitting multiple parts of the Iranian mainland, infrastructure and transport facilities there, as well as targeting US military bases in the region.
All of this followed the Iranian attack on commercial ships attempting to transit Omani waters.
Although this wave of escalation was the broadest of its kind since the signing of the memorandum of understanding, which at the time represented the largest diplomatic breakthrough of its kind since the outbreak of the war, and despite Trump’s statement that the truce has collapsed, traders seem to favour a near end to this war.
This comes in light of several factors that support this premise, including President Donald Trump’s desire not to prolong the war as the midterm elections approach, when Democrats will be waiting to catch him and the Republicans, at a time when the price of a gallon of gasoline remains near $ 4. In addition, prolonging this war could involve catastrophic consequences for the US economy, which Trump admitted while defending the signed memorandum of understanding. Furthermore, we have seen numerous reports from the US media itself about shortages in advanced defence stockpiles and the inability to replenish them quickly.
On the other hand, what might support the counter hypothesis of continued escalation, or at least a lack of movement toward a comprehensive diplomatic settlement of this war, is the pressure Trump might face from hardliners who call for continued military action against Iran, in addition to pressure from Israel.
The latter is also on the verge of elections that will lead to the formation of a new government. The coalition of Likud and hardline right-wing factions there might not want to enter the elections without achieving a decisive military victory against Iran or even Hezbollah in Lebanon, while polls indicate they could lose their majority in the Knesset as the popularity of left and center factions grows. Meanwhile, Prime Minister Benjamin Netanyahu may push for the return of this war across both fronts in an effort to achieve a decisive victory to market in these upcoming elections in October or September.
Additionally, the United States recently received intelligence from Israel speaking about Iran’s intention regarding a new plot to assassinate President Donald Trump, which could serve as a factor that reignites the war, according to what The Wall Street Journal quoted from officials.
We could also witness a gray scenario, namely the continuation of a state of no war and no peace, which might reflect a certain kind of balance between the opposing factors mentioned above. This could mean days of negotiations and talk of peace, and other days of skirmishes.
Under this scenario, we might see continuous fluctuations in oil prices, with supplies from the region remaining far from a full recovery, keeping global crude inventories at low levels for a prolonged period and, in turn, keeping prices relatively high compared to the prewar period. Meanwhile, if China renews its demand for crude and returns it to prewar levels, which represent nearly double the current levels of around 6 million barrels per day, this could exert massive pressure on prices and send them higher for a prolonged period, even under this gray scenario.
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