Oil Needs Catalysts Other Than Middle East Tensions To Gain More Ground

Just a few weeks ago, oil traders focused on weak economic data from China and worried about a potential slowdown of the U.S. economy. As a result, WTI oil touched lows near the $65.00 level, while Brent oil made an attempt to settle below $69.00.

The market sentiment has changed quickly as traders focused on rising tensions in the Middle East. However, it remains to be seen whether Israel – Hezbollah conflict will lead to any disruptions in oil supply. It should be noted that Israel – Hamas conflict or tensions between Israel and Iran did not lead to any changes in supply/demand balance in the oil markets.

Fed’s decision to cut the federal funds rate by 50 bps may serve as a bigger catalyst for oil prices. The potential slowdown of the U.S. economy is a significant risk for oil markets. In case Fed manages to orchestrate a soft landing, demand for oil will continue to grow at a decent pace, which will be bullish for oil.

Traders should also keep an eye on the moves from OPEC+. Demand for oil is growing, and so does supply. Meanwhile, OPEC+ maintains its production cuts, which means that the group is losing its market share. The recent pullback in the oil markets was strong enough to force OPEC+ to delay production increases.

However, delaying production increases for longer may be a challenging task for OPEC+. The countries in the group want to grow their oil revenue to boost their budgets, so it will be increasingly difficult to maintain unity regarding production policy. At this point, it looks that the risk of additional production from OPEC+ is the key risk for oil markets in the near term.

Traders should also monitor the developments in China, which is trying to revive its troubled housing sector. The previous stimulus measures did not provide sufficient support to the country’s economy, but the China’s government remains focused on boosting the pace of economic growth. In case China’s economy starts showing signs of stronger growth, oil prices will move higher.

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