Crude oil prices are up nearly 1% today across major benchmarks, following a five-day decline.
Oil heads to halt losses after China’s rate cut
The increase in oil prices is attributed to the People's Bank of China cutting interest rates more than anticipated as part of a broader economic stimulus plan that is expected to bolster demand for crude. This comes amid escalating tensions in the Middle East and a lack of resolution in sight, potentially reintroducing the geopolitical risk premium to oil prices.
The PBOC has lowered its Loan Prime Rate for one- and five-year loans by 25 basis points, bringing them to 3.1% and 3.6%, respectively. This decision follows previous measures aimed at assisting borrowers, particularly in the struggling housing sector.
While the market has reacted positively to the rate cut, skepticism remains about the effectiveness of these measures in supporting the economy. According to the Wall Street Journal, citing Capital Economics, the central bank's actions alone will not suffice, as demand for credit remains weak. A significant recovery in economic growth will require substantial fiscal support in addition to monetary measures.
Given these factors, analysts believe the recent gains in oil prices, influenced by China's economic situation, may be fragile and could quickly reverse.
This development also follows a slowdown in GDP growth last quarter, declining consumer price inflation, and a more rapid contraction in producer prices than expected, along with ongoing decreases in housing prices, all indicating persistently weak demand.
In the Middle East, the threat of regional conflict is growing, with no signs of de-escalation from Israel, increasing the likelihood of further clashes.
No signs of imminent ceasefire negotiations
Despite recent talks of a truce following the assassination of Hamas leader Yahya Sinwar, there are no signs of imminent ceasefire negotiations, and the situation has reportedly worsened over the weekend, according to the New York Times.
Although the White House has called for an end to hostilities, I believe the U.S. administration's calls for a truce lack seriousness.
In Lebanon, Israel has outlined its demands to the U.S. regarding the conflict there, as reported by several U.S. and Israeli officials speaking to Axios. These demands include permission for Israel to conduct operations in southern Lebanon to prevent Hezbollah from rebuilding its forces and allowing Israeli flights in Lebanese airspace. However, these conditions are likely to be rejected by Lebanon and the international community as violations of sovereignty. Thus, a resolution to the ongoing conflict appears unlikely given the high demands from Israel.
These demands echo those concerning the cessation of hostilities in Gaza, where military operations have intensified, especially in the northern region, coinciding with increasing reports of plans to evacuate the area's population, contradicting efforts to find a resolution.
Additionally, markets are bracing for a potential Israeli attack on Iran in retaliation for a recent missile strike. Republican Representative Lindsey Graham has stated in an interview that such an attack will occur soon and will be significant.
The oil market has adjusted its pricing due to concerns about the security of regional oil supplies, especially following a report from The Washington Post indicating that Israel will refrain from targeting Iranian oil facilities. This decision appears to align with U.S. administration demands, given the possible repercussions of such an attack on rising oil prices amid the presidential campaign season.
However, I believe that any Israeli military action will likely provoke a counter-response from Iran, raising the risk of targeting oil interests in the region during subsequent escalations after the elections, potentially causing sharp increases in crude prices in the coming weeks. According to Citi Research’s estimates published last week, such supply disruptions could drive crude prices to $80 and even $120 per barrel.
