Oil Prices Rise as Conflict in the Middle East Escalates

Crude oil prices started trade this week with a gain, after posting another week of losses, as an increase in violence in the Middle East prompted worry about supply while in the U.S. the Fed signaled it may start cutting interest rates next month.

Brent crude was trading above $79 in late morning trade in Asia today, with West Texas Intermediate above $75 per barrel.

A contributing factor for the latest moves in oil prices may also have been global supply, which has declined to a two-year low, with OECD stocks in particular much lower than the ten-year seasonal average, at minus 120 million barrels or 4%. U.S. oil inventories have been on the decline for several weeks in a row.

“Israel's pre-emptive strike on Lebanon over the weekend to prevent an imminent attack from Hezbollah should ensure a stronger open this morning as (WTI) crude looks to extend its rally initially towards $77.50, before $80.00,” Tony Sycamore, an analyst at IG, told Reuters.

However, “While risks in the Middle East are building following the latest escalation, the market is becoming increasingly immune to these tensions,” Warren Patterson, head of commodities strategy at ING, said, as quoted by Bloomberg. “It has been going on for almost a year now and is yet to have an impact on oil supply.”

“We would expect any rally on the back of these developments to be rather short-lived except if Iran were to become more directly involved, as this would raise oil supply risks more meaningfully,” Patterson also said in a note.

In a further boost for prices this week, the chairman of the U.S. Federal Reserve signaled last week that an interest rate cut is definitely on the table for the central bank’s next monetary policy meeting, in September.

“The time has come for policy to adjust,” Powell said on Friday at the Kansas City Fed's annual economic conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” the Fed’s chairman also said, as quoted by Reuters.

By Irina Slav for Oilprice.com

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