- The war between Israel and Hezbollah heated up on Thursday.
- Crude inventories rose by 5.5 million barrels, well above forecasts for a 270,000-barrel increase.
- US unemployment claims dropped to 227,000 last week.
Oil prices rose 1% on Thursday, recovering from the 1% loss in the previous session. The rally came as Middle East tensions escalated. Meanwhile, the decline on Wednesday came after a bigger-than-expected increase in crude oil inventories.
The conflict between Israel and Hezbollah heated up on Thursday, raising fears of a broader war that would impact oil distribution. Moreover, it dashed hopes for a near-term ceasefire, boosting oil prices. Hezbollah hit Israel with missiles soon after confirmation that Israel killed the heir to their slain leader. At the same time, Israel attacked the Syrian capital, Damascus, widening the war.
Meanwhile, market participants remained on edge ahead of the US presidential election. The next president’s policies will likely impact the Federal Reserve’s monetary policy. A Trump win is more likely to increase inflation and interest rates.
Therefore, it would mean a pause or pivot of the current cutting cycle and a dimmer outlook for oil demand. On the other hand, policies that will support the Fed’s current rate-cutting cycle could boost oil prices. Therefore, the outcome will cause some market turmoil.
On Wednesday, oil prices dropped sharply after data revealed a bigger-than-expected increase in crude inventories. Stocks rose by 5.5 million barrels, well above forecasts for a 270,000 barrel increase. However, experts noted that most of this came from a rebound in crude imports and the effects of recent hurricanes. Nevertheless, it painted a picture of poor demand.
WTI Futures (Source: Bloomberg)
Investors have been worried about the outlook for global oil demand in the past few weeks due to China’s weak economy. Oil fell 7% last week due to these worries and the calm in the conflict between Israel and Iran. However, China has made many efforts to support the fragile economy, which has helped stabilise prices.
Elsewhere, data on Thursday revealed a strong US labor market, continuing the trend of resilience. Unemployment claims dropped to 227,000 last week, compared to expectations of 243,000, showing solid demand for labor. Such upbeat economic indicators will keep lowering the likelihood of a November Fed rate cut, hurting oil prices. Markets are increasingly pricing just one more rate cut this year. At the same time, a stronger dollar makes oil more expensive for foreign buyers, reducing demand.
