Crude oil is declining across both major benchmarks at the start of the new week’s trading, by approximately 1% for Brent and WTI, respectively, at 8:00 a.m. GMT.
Today’s oil decline comes after a weekend that witnessed an unprecedented expansion of the conflict in the Middle East, in addition to relatively weak hope about the possibility of the Federal Reserve cutting interest rates in June.
We had witnessed the beginning of a new phase of conflict in the Middle East, with Iran directly joining the ongoing war, away from the shadow wars.
Meanwhile, the Iranian response to the targeting of its consulate appeared to be wise and calibrated so as not to drag the region into a wide regional war that cannot be contained. This is what the markets have been expecting over the past few days and are actually pricing in, and this explains the poor performance of the oil markets today.
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I think that what the markets may fear today is the opposite response from the Israeli side, which may be extremely reckless, unexpected, and without any strategic goal other than keeping Benjamin Netanyahu at the head of the war government, in contrast to the declared goals of the active actors, whether the United States or Iran.
On the economic side, frustration prevails about the possibility of the beginning of the easing path of the Federal Reserve’s monetary policy next June, while more and more postponement of interest rate cuts may keep the growth of the global economy weak, as well as the demand for oil. While the probability that the Fed will cut rates by 25 basis points is only about 21%, after it was more than 50% just a week ago, according to CME FedWatch Tool.
This shift in expectations has contributed to pushing Treasury yields further higher, which they also resumed today. While the continued trend of rising yields will contribute to fueling the rise in the US dollar, which may stand in the way of oil benefiting from the positive factors.
The focus is now turning to a set of crucial data from China tomorrow morning, whether from gross domestic product, industrial production, fixed asset investments, and labor market figures.
Many previous readings from the largest oil importers have already helped support crude prices, while more positive surprises tomorrow may push to more high levels, which will mix with worsening geopolitical concerns at the same time.
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