During the IMF and World Bank meetings held in Morocco last week, finance ministers and officials from various countries warned of signs of a wider conflict in the Middle East that could pose a new threat to the global economy. Financial markets have priced in the risks, with significant fluctuations observed last week. Gold surged by $60 on Friday (+3.4%) to $1932, posting an astonishing weekly gain of $100 (+5.4%), the best performance since March, highlighting its safe-haven characteristics. Crude oil also rebounded, with Brent crude surpassing $90, rising 7.5% for the week.
In terms of gold and oil, institutions believe that the latter has more certain upward momentum by the end of the year, while the price of non-yielding gold will always be suppressed by the hawkish attitude of the Federal Reserve. Yang Aozheng, Chief Chinese Market Analyst at FXTM, told reporters that Russia and OPEC are the key suppliers of oil, and the recent Israeli-Palestinian conflict has little substantial impact on oil supply. However, with the onset of the winter heating season, there is a seasonal upward momentum in oil prices. In addition, OPEC’s assumption of oil prices at around $90 in its 2023 fiscal budget suggests that OPEC is likely to maintain its production cut in order to support oil prices. The resilience of the US economy and its demand are also crucial. If oil prices continue to rise, it is not ruled out that they could first hit the $100 mark, which would create greater uncertainty in the process of global central banks fighting against inflation.
Crude oil may still break through upwards as the geopolitical risk in the Middle East escalates. With Israel’s ground forces entering the Gaza Strip, political and geopolitical risks in the Middle East have increased. Coupled with the long-awaited weekly decline in US Treasury yields (as risk funds flowed into US Treasuries), WTI crude oil reached nearly $88 after a 5% single-day jump on Friday, with a weekly increase of nearly 6%. Brent crude oil surpassed $90, rising 7.5% for the week. The closure of a natural gas plant by Israel last week caused European natural gas futures prices to soar by 41% for the week, and potential supply interruptions and the security of transportation routes have become the market’s primary concerns.
As of 19:00 Beijing time on October 17, spot gold was reported at $1920, and Brent crude oil was reported at $89.98. Before the deterioration of the situation in the Middle East, gold, which had been affected by the strong US dollar and high interest rates, was weak and even showed a trend of falling to around $1800. However, the subsequent risk aversion sentiment started to push up the price of gold. Although the Israeli-Palestinian conflict has little substantial impact on oil supply, the sentiment in the oil market has been consistently boosted.
Daan Struyven, Chief Oil Analyst at Goldman Sachs Research, mentioned in an email to reporters that the recent oil supply-demand balance and inventories may not be immediately affected. However, this event could have two potential impacts on global oil supply, which may increase over time: a decrease in the possibility of normalizing Saudi Arabia-Israel relations and the associated increase in Saudi production; and a potential downside risk to Iran’s oil production. Both of these effects pose upward risks to oil prices. Goldman Sachs maintains its previous forecast that Brent crude oil prices will gradually rise to $100/barrel by June 2024.
Yang Aozheng told reporters that compared to the Russia-Ukraine conflict, the impact of the Israeli-Palestinian conflict on oil supply is actually small because Iran’s production is almost negligible compared to Saudi Arabia and Russia, especially since Europe and the United States import very little Iranian oil. The more critical factors for oil prices are the oil supply from Saudi Arabia