Home Business News Oil price plummets as the outbreak of war in the Middle East seems to be the only way out

Oil prices continue to decline sharply today and reach more of their lowest levels that we have not seen since last February, across both major benchmarks, Brent and West Texas Intermediate, which fell by 1.2% and 1.4%, respectively, at 8:45 a.m. GMT.

These declines come as a continuation of the markets’ reaction to concerns about increasing oversupply, which exacerbated after the decision of the Organisation of Petroleum Exporting Countries and Russia (OPEC+) to begin halting the voluntary reduction in oil production late this year.

These concerns about oversupply were mixed with concerns about the health of the US economy, as it witnessed a larger-than-expected contraction in manufacturing activities, which came in light of the decline in demand due to the unwillingness of companies to invest due to monetary and economic conditions, according to the Institute of Management. Supply Chains (ISM) PMI report for May.

On the bright side, this weakness in economic activity has finally been reflected by slightly raising hopes that the Fed will cut interest rates next September and November.

However, energy markets appear to need more certainty about whether they can see the start of monetary easing this year to push weak economic growth into a further recovery.

However, positive surprises in labor market data this week may contribute to deepening oil losses as concerns about higher-for-longer rates.

While we may begin to see some relief in the oil markets with the European Central Bank beginning to cut rates expected at its next meeting, this would contribute to pushing economic activities to regain their growth, especially at the level of manufacturing activities.

Many previous PMI reports and consumer and investor surveys indicated that inflation and high interest rates prevent demand uptake and the restoration of growth, in addition to a state of uncertainty regarding internal political and regional and global geopolitical factors.

This potential recovery in demand as monetary tightening eases will eventually find its way to China, which the Eurozone and the European Union are its key trading partners while it is still suffering from weak domestic consumer demand.

Therefore, I believe that the Eurozone economic data will be very important to the markets that are looking for signs about the recovery of the global economy and the subsequent recovery in demand for crude and bridging the supply gap.

This narrative may take some time to be priced. While the geopolitical front remains a key factor that that can support prices, although the related concerns are not the focus of the markets at the present time, as it may lift prices from their bottom at any moment. Even that over the past two months, fears of a widespread regional war in the Middle East have dissipated.

It seems that the southern Lebanese front is preparing to ignite little by little, with more pressure on Benjamin Netanyahu from the right-wing coalition, that keeps him at the head of the war government, and the internal parties, which may eventually lead him to open the northern front as happened in 2006.

This comes at a time when the possibility of reaching a ceasefire in Gaza does not seem close after the proposal presented by Joe Biden, which is extremely unlikely to be accepted by any of its parties. While this extension of the war continues, fears of it getting out of control remain present at all times, and this is what we are seeing now, whether in southern Lebanon or the Red Sea, with the unprecedented escalation.

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