Oil soars on Israel attack, but no panic on Wall Street

Oil prices rose by 5% on news that Hamas attacked Israel. US equity markets rallied after early morning weakness, led by the Russell 2000 up. Typical safe haven assets like the dollar and gold were modestly higher. Financial markets are waiting to gauge action by Israel and the US before pricing in broader geopolitical risk.

Bottom line: risk-on.

TODAY’S MAJOR NEWS

Crude oil rocked by Israel-Palestine ‘war’

The scale of Hamas’ military attack on Israel from the Palestinian enclave of Gaza rocked energy markets, with markets perceiving more significant supply-side risks and a much higher oil price. Violence on this scale, labeled ‘war’ by Israel, raises risk premiums across the oil complex. Commentators expect a long war and the possibility of more players – Iran, Hamas’ principal backer, and Saudi Arabia, which is close to a rapprochement with Israel – being drawn into the conflict.

Last week’s crude selloff ended abruptly in early trading this week for good technical reasons, according to Harry Altham, StoneX Energy Analyst. When the news broke, Brent crude and WTI oil prices surged by $4 per barrel. Altham reports that last week’s $11 selloff saw Brent and WTI crude enter oversold conditions. Managed money vacated oil positions: speculative long positions fell 8% last week, and net positions moved 10% lower. “Although we consider this week’s pricing fundamentals bullish, we hadn’t expected this sharp a rise to start the week – until Saturday morning at least,” Altham comments.

Against this backdrop, any supply-side disruption could put further upward pressure on the oil price. OPEC has revised up its medium and long-term oil demand estimates in contrast to more downbeat forecasts from the EIA and IEA. OPEC revised up 2027 demand by 2.1M bbd and 2045 demand by 6M bbd against last year’s long-term report, which contrasts with other agencies that predict that oil demand will peak before the end of this decade.

Why should this war matter to the markets?

An Israel-Hamas war matters because of the proxy countries involved, notably the US and Iran. Commodity traders are concerned by location, the oil-rich Middle East. This war puts the implementation of the Abraham Accord on hold, with Saudi Arabia now assessing its rapprochement with Israel brokered by the US. The US backs Israel but no longer has good relations with the Saudis. China has been fostering a peace accord between Iran and Saudi Arabia. Many Arab members of OPEC have been negotiating entrance into BRICS as they strengthen relationships with China and Russia.  This web of conflicting relationships changes the dynamics of this war and raises the risks of spreading regional conflict. Israel is focused on funding ties between Hamas and Iran so that it may retaliate with Iran.

Whatever the specific outcome, the security of the oil supply from the region is in doubt. We’re not at that point now, but traders added a risk premium to crude oil prices overnight on the possibility. One thing is clear after this weekend – the world is less stable than it was on Friday.

Inflation reports will guide Fed interest rate moves

Wednesday’s producer prices (PPI), Fed Minutes, and Thursday’s consumer price inflation (CPI) will focus on the Fed’s next interest rate move on November 1.  Forecast data suggest that the inflation picture is unlikely to improve significantly. Headline CPI inflation is forecast to fall to 3.6% annually from 3.7% last month; core CPI inflation (ex-food and energy) is forecast to fall to 4.1% annually from 4.3% last month. Headline PPI inflation is forecast to be unchanged at 1.6%; core PPI inflation (ex-food and energy) is forecast to be unchanged at 2.2%

TODAY’S MAJOR MARKETS

Russell 2000 bounces back after attack shock

• The Russell 2000 led markets higher after initial weakness, up 0.9% in early afternoon trading, with the S&P 500 and Nasdaq up 0.7% and 0.5% respectively
• Foreign markets were weaker overnight on news from the Middle East, with the DAX and Nikkei 225 off by 0.7% and 0.3%, respectively, while the FTSE 100 was unchanged
• The VIX, Wall Street’s fear index, was unchanged at 17.7 (having spiked to 19.6 in morning trade)

Bonds and dollar unchanged

• 2- and 10-year yields were essentially unchanged at 5.1% and 4.8%
• The dollar index was unchanged at 106.1
• Versus the dollar, the Yen was up 0.5%, while the Euro was down 0.2% and Sterling was unchanged

Oil prices bounce back after recent sell-off

• Crude oil prices were up 4.5% at $86.5 per barrel, sharply reversing recent price weakness
• Spot gold prices rose 1.1% to $1,845 per ounce, while silver rose 0.9% to $21.9 per ounce
• Grain and oilseed markets are mostly higher as well, although not with the same conviction as crude oil

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]