The decline in crude futures exceeded 2% after the release of a Producer Price Index inflation report that surpassed expectations, coupled with indications suggesting that the ongoing war between both Israel and Hamas is unlikely to escalate to involve additional nations, particularly Iran.
During the middle of Wednesday’s trading session, it was seen that the West Texas Intermediate (CL=F) crude oil futures were trading at a price that was slightly higher than the threshold of $84 each barrel. A fee of little more than $86 for every barrel was seen in the Brent International (BZ=F).
The Likelihood of New Sanctions Remains Low
It has been reported that US intelligence assessments show that Iranian authorities were taken aback by the recent incident in Israel that was carried out by Hamas, as disclosed in an article published by The New York Times on Wednesday. As a result of this discovery, it appears that the likelihood of Western nations imposing new sanctions upon Tehran or directly targeting the Islamic Republic is low.
In reaction to an unexpected attack on Israel carried out via the Palestinian group Hamas, the oil price saw a massive surge on Monday that was almost 4% higher than it was the previous day. Because of this new development, there is reason to be concerned about the possibility of escalating the conflict in the Middle East area.
By Tuesday, prices had achieved stability, as no indications had emerged to suggest that Iran, a longstanding ally of Hamas, was implicated in the attacks above.
If the conflict remains confined to Israel and Hamas, it is unlikely that supplies will be significantly disrupted.
JPMorgan Does Not Forecast Oil Supply Problems
In a note that was sent out to clients on Tuesday, Natasha Kaneva, who is in charge of JPMorgan’s commodities international policy team, stated that even though there is a lot of uncertainty in the market, it is unlikely that the battle that is now taking place in Israel would have a substantial impact on oil supply.
According to the assertion, the ongoing oil production worldwide has not been subjected to any immediate implications. On the other hand, it is essential to note that the market is aware of the possibility of supply interruptions if the United States strictly enforces limitations on Iranian oil shipments or if problems spread to the Strait of Hormuz. Both of these scenarios are worthy of consideration.
A central maritime channel near Iran, the Strait of Hormuz, makes it possible to transport an estimated range of seventeen million to eighteen million barrels of crude oil and processed goods per day.
According to a recent communication addressed to clientele, Andy Lipow, an esteemed representative of Lipow Oil Associates, has expressed that the potential closure of the Strait would likely lead to a notable escalation in the oil price, estimated to range between $20 and $30 per barrel.
It is worth noting that Iran presently exports approximately 2 million barrels per day of crude oil, with a significant portion of this volume being directed toward the Chinese market.
According to the individual’s statement, if Iran were to cease its oil exports, it is posited that the resultant reduction of 2 million barrels per day in the global oil market could potentially lead to an increase in prices ranging from $10 to $14 per barrel.
In the event of a scenario involving the deployment and subsequent destruction of Iranian oil facilities due to missile activity, it is anticipated that the resultant impact on the market would be significantly more pronounced. This is primarily due to the perception within the market that such an occurrence would likely escalate tensions, potentially leading to the closure of the strategically vital Strait of Hormuz.
Producer Price Index Led to a Slight Decline in Oil Prices
The decline in oil prices can be attributed to the release of a Producer Price Index on Wednesday morning, which indicated higher-than-expected heat levels. According to the most recent data, wholesale prices experienced a higher-than-anticipated increase in September, indicating a persistent presence of inflationary pressures.
Elevated price levels indicate a probable inclination of the Federal Reserve to maintain higher interest rates for an extended duration as part of its endeavor to mitigate inflationary pressures and moderate economic growth. A decline in oil demand is anticipated during an economic recession or deceleration.
The crude market experienced a subsequent retreat from its peak levels in September 2023, following the ascent of WTI prices beyond $94 per barrel and the sustained presence of Brent prices above $96 per barrel.
The average quarterly oil price experienced a notable increase of 28% due to implementing output cuts by OPEC+ and additional supply constraints imposed by Saudi Arabia and Russia. Consequently, this led to a deficit in the market.