During the IMF and World Bank meetings in Morocco last week, finance ministers and officials from various countries warned of signs of a broader conflict in the Middle East that could pose a new threat to the global economy. Financial markets have priced in the risks, and there was significant volatility last week – gold surged $60 (+3.4%) to $1932 on Friday, with a staggering weekly gain of $100 (+5.4%), the best performance since March, showcasing its safe-haven characteristics. Crude oil also rebounded, with Brent crude rising 7.5% and surpassing $90 per barrel last week.
In terms of gold and oil, institutions believe that oil has a more certain upward momentum towards the end of the year, while the non-yielding gold price will continue to be suppressed by the hawkish stance of the Federal Reserve. FXTM’s chief analyst, Yang Ao, told reporters that Russia and OPEC are the key suppliers of oil, and the recent Israeli-Palestinian conflict has had minimal impact on oil supply. However, with the peak heating season approaching and OPEC assuming oil prices around $90 in its 2023 fiscal budget, OPEC is likely to maintain its production cuts to support oil prices. The resilience of the US economy and its demand are also crucial. If oil prices continue to rise, there is a possibility of reaching the $100 mark, which would create greater uncertainty for central banks worldwide in their fight against inflation.
Crude oil may still break through the upside. With the entry of Israeli ground forces into Gaza, geopolitical risks in the Middle East have escalated. In addition, the retreat of US Treasury yields, which attracted safe-haven funds into US bonds, WTI crude oil jumped nearly 5% on Friday, approaching $88, and increased by nearly 6% for the week. The price of Brent crude surpassed $90, rising 7.5% for the week. Due to the closure of a natural gas plant by Israel last week, European natural gas futures prices skyrocketed by 41% for the week, and potential supply disruptions and the security of transportation routes have become the market’s main concerns.
As of 19:00 Beijing time on October 17th, spot gold was priced at $1920, and Brent crude oil was priced at $89.98. Before the deterioration of the situation in the Middle East, gold was languishing under pressure from a strong US dollar and high interest rates, with a trend of falling to around $1800. However, the emergence of safe-haven sentiment pushed gold prices higher. Although the Israeli-Palestinian conflict has had minimal impact on oil supply, the sentiment in the oil market has been significantly boosted.
Daan Struyven, chief oil analyst at Goldman Sachs Research, mentioned in an email to reporters that the recent oil supply-demand balance and inventory are not expected to be significantly affected. However, this event has two potential impacts on global oil supply, which may increase over time: first, the possibility of the normalization of relations between Saudi Arabia and Israel, which would reduce the possibility of Saudi Arabia increasing production, and second, the potential downward pressure on Iranian oil production. These two factors pose upward risks to oil prices. Goldman Sachs maintains its previous forecast that Brent crude oil prices will gradually rise to $100 per barrel by June 2024.
Yang Ao told reporters that compared to the Russo-Ukrainian conflict involving major oil-producing countries, the impact of the Israeli-Palestinian conflict on oil supply is minimal because Iran’s production is almost negligible compared to Saudi Arabia and Russia. Moreover, even after Iran re-entered the oil supply market, Europe and the US imported very little Iranian oil. The key factors for oil prices are the supply from OPEC countries such as Saudi Arabia and the demand from major markets like the US and China. In fact, oil prices were sluggish in the first half of this year, and in the second and third quarters, they were stuck in a range due to the expectation of overseas recession.