Oil's geopolitical risk premium continues to build
Daniel Hynes
Senior Commodity Strategist | helping investors and companies navigate macro, political, economic & environmental issues
Highlights
Hostility in the Middle East lifted energy markets higher. Metals were steady ahead of the reopening of Chinese markets.
Prices and commentary accurate as of 07:00 Sydney/05:00 Singapore/17:00(-1d) New York/22:00(-1d) London.
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Ahead Today
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Market Commentary
Brent crude oil surged to its highest levels in more than two months amid mounting concerns of supply disruptions in the Middle East. The global benchmark hit USD80/bbl as expectations grow that Israel will target Iran’s oil infrastructure in retaliation for a missile attack last week. President, Biden’s comments didn’t allay these fears. He said, “I’d be thinking about other alternatives than striking oil fields”. Tension in the region is building. Hamas fired a barrage of rockets towards Tel Aviv, while Israel sent troops back into northern Gaza and kept up aerial attacks in Lebanon. We still think a direct attack on Iran’s oil facilities is the least likely of Israel’s retaliation options. Moreover, we have noted a diminishing in the impact of geopolitical events on oil supply. Any impact loss of supply can be covered by OPEC’s 7mb/d of spare capacity. Elsewhere, potential supply disruptions in the Gulf of Mexico supported prices. Hurricane Milton is bearing down on the region, and Chevron has closed its Blind Faith oil platform in anticipation.
Global gas prices rose on fears of a wider hostilities in the Middle East. Last week, European benchmark futures rallied to their highest level this year as increased risks to supply comes as the region prepares for heating season. The higher prices in the Atlantic market have seen three LNG tankers from the US change course after initially heading to Asia. The market is also on edge over Russian gas flows via Ukraine amid attacks on energy infrastructure. However, European futures gave back some gains on Monday as high storage levels and weak demand eased concerns. The hostilities in the Middle East also helped raise North Asian LNG prices.
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Gold prices edged lower as the market pared back expectations of another 50bp cut to rates. Friday’s strong US job numbers undercut chances of another big rate cut, with money market now pricing in less than a 25bp move next month. This has also seen money managers cut the net long positions in gold futures on the Comex to a three-week low as of 1 October, according to CFTC data. Nevertheless, ongoing demand for haven assets and a slightly weaker USD saw overall investor demand remain strong. US inflation data out later this week should provide further clues on the Fed’s outlook for rates.
Base metals held steady, as traders await the reopening of Chinese markets after a weeklong holiday. Sentiment among Chinese attendees at last week’s LME Week in London was particularly buoyant following Beijing’s recent economic stimulus packages. This has raised the prospect of a sustained boost to demand. Five senior officials from the National Development and Reform Commission are scheduled to speak at a press briefing that may outline further plans for public spending. Nickel managed to push higher as supply cuts came back into focus. Power issues at Vale’s Onca Puma operation in Brazil will disrupt supply. Japan’s Sumitomo Corp is said to be assessing operations at its Ambatovy nickel mine in Madagascar after a slurry pipeline was damaged. These come after a quiet period following several supply closures at the start of the year.?
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Chart of the Day
Nickel inventories in LME warehouses continue to build, suggesting more supply cutbacks are required.?