- The conflict between Iran and Israel escalated when Iran fired 180 missiles at its opponent.
- US crude inventories rose by 3.9 million barrels last week.
- Data revealed that private employment rose more than expected in September.
Oil prices have rallied since Wednesday due to supply concerns stemming from increased tensions in the Middle East. However, a build in US crude inventories indicated weak demand, weighing on prices.
Brent futures (Source: ICE)
The conflict between Iran and Israel escalated when Iran fired 180 missiles at its opponent. Meanwhile, Israel vowed to hit back, which is raising fears of oil supply disruption. If Israel targets Iranian oil production, prices might rally further. At the same time, if the conflict escalates, it could drag in more countries like the United States.
Furthermore, Israel sent more military to Lebanon, where another war with Hezbollah is simmering. The rising geopolitical tensions have put a premium on oil as market participants anticipate tighter market conditions.
Meanwhile, US crude inventories rose by 3.9 million barrels last week, beating estimates for a 1.3 million build. The increase in stocks is a sign that demand was low.
Elsewhere, OPEC+ met and agreed to keep output policy unchanged. However, analysts expect the organisation to increase output monthly starting in December. Some analysts have expressed concern that an output increase would sink oil prices, but the organisation has dismissed such fears.
The dollar rose on Wednesday, making oil expensive for foreign buyers. The rise came after data revealed that private employment grew more than expected in September. Notably, the ADP number increased by 143,000 compared to expectations of 124,000. The report clearly indicated a slow and gradual Fed easing cycle.
The US Federal Reserve started its easing cycle with a 50-bps rate cut. Consequently, market participants expected more such rate cuts in November and December. However, Powell recently dismissed these hopes, suggesting two 25-bps rate cuts for the year.
Meanwhile, the unemployment claims report on Thursday revealed a slight increase in claims last week. Claims rose by 225,000, slightly above forecasts for 222,000.
All focus is now shifting to Friday’s nonfarm payrolls report. Economists expect a modest increase in jobs, with the unemployment rate holding steady at 4.2%. A better than expected report would support Powell’s view of a small rate cut in November. On the other hand, if the labor market is deteriorating, the Fed might be forced to make another big move.
