Head of Commodity Strategy
Summary: Crude oil futures trade up +3% while gold has found a haven bid after Hamas’ attack on Israel raised concerns about stability in the Middle East, particularly with focus on Iran after the WSJ reported that Iran helped plot the attack over several weeks. The situation is tense and with some calling this Israel’s 9/11 moment, the risk of an escalation is still high as Israel and potentially also the US responds. But for now, with no clear impact on supply, the first buying response has been driven by traders adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent, the global benchmark.
Global Market Quick Take: Europe
Macro Digest: Middle East in Focus
Commodity Weekly (from Friday): Yield surge drives steep crude and gold correction
Crude oil futures trade up +3% while gold has found a haven bid after Hamas’ attack on Israel raised concerns about stability in the Middle East, particularly with focus on Iran after the WSJ reported that Iran helped plot the attack over several weeks. The situation is tense and with some calling this Israel’s 9/11 moment, the risk of an escalation is still high as Israel and potentially also the US responds. But for now, with no clear impact on supply, the first buying response has been driven by traders adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent, the global benchmark.
The market's foremost concern revolves around potential disruptions in supplies from regions like Iran. The ongoing conflict has the potential to worsen tensions between the involved countries, especially considering President Joe Biden's unwavering commitment to supporting Israel. At present, there is no immediate threat to the oil supply, but the market is understandably apprehensive. Often, market sentiment and concerns can exert greater influence than the actual underlying fundamentals.
Crude oil spiked $4 on the opening but for now with no impact on supply, Brent remains below $90 with the first buying response being driven by traders adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent, the global benchmark. Notably, one of the most significant surges in exports this year has apart from US shale, been attributed to Iran where production and exports have risen as the US turned a blind eye to Iran bypassing American sanctions. As the result its production has risen by close to 600,000 barrels during the past year while crude stored on- and offshore has been sold into market, thereby mitigating some of the tightness being orchestrated by Saudi Arabia and Russia. Should the spotlight turn towards Iran, there's a possibility of stricter sanctions being imposed, potentially leading to supply constraints and tightening conditions within the market.
In the week to October 3, hedge funds reacted to an emerging correction in crude oil by cutting their WTI and Brent long by 33k contracts to 525k, thereby making a first small reduction in the 170k contracts that was bought after Saudi Arabia and Russia said current unilateral production cuts would be extended until yearend. However, while the WTI long has increased by 235k to 307k since July 1, the Brent long has risen by just 58.5k to 218k, highlighting a market were tight supplies in the US, especially at Cushing, the important delivery hub, have supported buying of WTI while funds have kept a relative low interest in Brent with growth concerns partly offsetting current tight supply worries.
In our latest commodity weekly, published on Friday before the latest crisis erupted, we highlighted the tug of war between supply and demand, and the impact on prices of this alternating focus. However, the combination of fresh geopolitical risks and prices having returned to levels seen before last month’s announcement from Saudi Arabia and Russia about a production cut extension to yearend, the prospect for further price declines looks increasingly limited, with a break above $89 as per the chart below potentially triggering added momentum buying. In the short-term it’s all eyes on Iran and a potential response from Israel.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
