The military confrontation between Israel and Hamas in Gaza has sent oil prices surging to their highest level in more than a year, as investors fear a disruption in supply from the region. Brent crude, the global benchmark, jumped by $3.14 to $87.72 a barrel on Monday, while U.S. West Texas Intermediate rose by $3.28 to $86.07 per barrel.
The spike in oil prices came as Israel launched a massive air and ground assault on Gaza, killing hundreds of Palestinians and wounding thousands more. Hamas, the Islamist group that controls the enclave, retaliated by firing rockets into Israel, killing 700 Israelis and abducting dozens more. The conflict, which erupted on Sunday, has raised concerns about the stability of the Middle East, which accounts for about 40% of the world’s oil production. Iran, a major oil exporter and a supporter of Hamas, could also face retaliation from Israel or its allies, potentially disrupting its oil exports.
The Israeli shekel plunged to its lowest level since early 2015 at 3.9880 per dollar on Monday, prompting the country’s central bank to intervene by selling up to $30 billion for shekels. The bank also said it would provide liquidity to markets as needed. The rising oil prices have added to the inflationary pressures that have been building up in the global economy due to the pandemic recovery and Russia’s invasion of Ukraine earlier this year. Higher oil prices act as a tax on consumers and businesses, reducing their purchasing power and profits.
The inflation outlook has also been influenced by the strong U.S. jobs report for September, which showed that the economy added 531,000 jobs and the unemployment rate fell to 4.8%. The robust labor market data raised expectations that the Federal Reserve would soon start tapering its bond-buying program and possibly raise interest rates next year. However, the developments in the Middle East could alter the Fed’s plans, as they could dampen economic growth and confidence, while boosting inflation. Markets are now pricing in an 86% chance that the Fed will keep rates unchanged in November, and around 75 basis points of cuts for 2024.
Investors will be closely watching the U.S. consumer price index for September, due on Wednesday, for further clues on the inflation trajectory. Analysts expect a 0.3% increase in both the headline and core measures, which would lower the annual inflation rate slightly. The minutes of the last Fed meeting, due on Thursday, will also provide insights into how policymakers are assessing the economic situation and their policy stance.
Meanwhile, China will return from a week-long holiday with a slew of data releases, including trade, inflation, credit and lending growth. The world’s second-largest economy has been facing headwinds from power shortages, property market woes and regulatory crackdowns. The uncertainty and volatility in the global markets have boosted the demand for safe-haven assets such as U.S. Treasuries, gold and the Japanese yen. Gold rose 1.1% to $1,852 an ounce on Monday, while the yen gained 0.3% against the dollar to 149.14 yen.
The risk-off sentiment also weighed on equities, as U.S. stock futures fell by about 0.8% on Monday. European stocks also opened lower, while Asian markets were mixed amid thin trading due to holidays in Japan and South Korea. The corporate earnings season will kick off this week with reports from major U.S. banks such as JP Morgan, Citi and Wells Fargo. Analysts expect modest sales growth and flat earnings per share compared to last year.
Despite the gloomy mood in the markets, some analysts remain optimistic that the Middle East conflict will not escalate into a wider war and that oil prices will stabilize soon. “We do not expect this conflict to have a lasting impact on oil markets,” said Edward Moya, senior market analyst at OANDA. “Both sides have an interest in avoiding a prolonged war that would only bring more suffering and instability to the region.”
Source: [Reuters]
