Oil Prices May Climb Higher Amid Risk of Middle East Supply Disruptions

Economic

Summary:

While there’s been persistent geopolitical turmoil, with wars in Ukraine and the Middle East, the physical supply of oil hasn’t been impeded, says Goldman Sachs Research’s Daan Struyven in an episode of Goldman Sachs Exchanges.

Oil prices jumped last week after Iran struck Israel in a missile attack, raising the prospect of possible disruptions to supplies of crude from the Middle East.

Oil Prices May Climb Higher Amid Risk of Middle East Supply Disruptions_1

The big question for investors is whether further escalation in the conflict in the Middle East is going to lead to a reduction in supply from Iran, says Struyven, co-head of commodities research in Goldman Sachs Research. Big oil producers have a lot of spare capacity available, but much will depend on the severity of any disruption to oil supply from Iran and whether, and how quickly, other major producers ramp up production.

How much could oil prices rise in a supply disruption?

Goldman Sachs Research forecasts Brent crude oil will trade in a range of $70-85 per barrel, with an average price of $77 in the fourth quarter and $76 next year, assuming there’s not a major supply disruption. Struyven’s team estimated the potential impact of two hypothetical scenarios of curtailed oil supply:

Assuming a 2 million barrel-per-day disruption to Iran supply for six months, Brent could temporarily rise to a peak of $90 if OPEC producers rapidly offset the shortfall. Prices could peak in the mid $90s next year without an OPEC offset.Assuming a 1 million barrel-per-day persistent disruption to Iran supply, reflecting for instance a tightening in sanctions enforcement, Brent could reach a peak in the mid $80s if OPEC gradually offsets the shortfall, and a 2025 peak in the mid $90s without an OPEC offset.

Historically when there’s been an oil supply disruption in the Middle East, Saudi Arabia and the United Arab Emirates, which have combined spare capacity of more than 4 million barrels, have offset about 80% of lost supply within two quarters. “So that will be a key thing to watch if we were to see actual disruptions,” Struyven says.

Typically the core OPEC countries, such as the UAE and Saudi Arabia, step in when there’s a dislocation in oil production — but with a lag. The rising production from OPEC+ tends to be slower than the drop in supply due to the disruption. “So it probably mean a tighter market and higher prices until the market rebalances eventually,” Struyven says.

And while the US is now the largest oil producer, accounting for roughly 20% of global supply, much of the spare capacity, or insurance against supply disruptions, “is very much concentrated in the Middle East,” he says. The UAE, Saudi Arabia, and Kuwait together account for about 80% of spare capacity.

“So the key question is, if we see escalation, will they be able to get the barrels to the market? And second, will they be willing to bring the barrels back to the market?” Struyven adds.

Will demand from China increase oil prices?

When it comes to oil demand, is there scope for China’s recent economic stimulus to change the balance relative to supply?

“Not so much,” Struyven says. Even as China was the main driver of oil demand growth in the five or 10 years before the pandemic, the US remains the largest consumer of oil. The upside demand from China’s recent stimulus measures, meanwhile, appears relatively limited. High frequency data on Chinese demand are soft, and our economists forecast that the package discussed so far would boost GDP growth by only about 40 basis points.

If Chinese policymakers were to implement other measures to support the economy, they could be designed to accelerate the country’s shift away from oil, for example, by increasing the build out of charging infrastructure for electric vehicles.

Oil demand from other countries, however, could be stronger. “Over the last couple of years, oil demand has surprised to the upside, especially in the US but also in places like India,” Struyven says. Interest rate cuts by the US Federal Reserve may support demand in the US and abroad, especially if those cuts lead to a cheaper US dollar, which could help lower the cost of oil products outside the US.

“The trend for oil demand growth in developed markets is now negative, because of energy efficiency gains and the rollout of EVs,” Struyven says. “But we forecast positive oil demand growth, both in the US and the OECD more broadly, precisely because we have above consensus, above trend US GDP forecasts.”

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

ADP

Economic

Hurricane Helene last month delivered a 600-mile path of destruction through six states—Florida, Georgia, South Carolina, North Carolina, Tennessee and Virginia—and Hurricane Milton followed with a second blow last week across central Florida.

After September’s surprising boost in job gains delivered clarity on the strength of the U.S. economy, Helene and Milton are likely to influence economic data in the weeks and months ahead. Here’s what to watch.

A drop in hours worked

The first place we’re likely to see the hurricane effect is in average hours worked. For millions of people and establishments, daily routines have been displaced by recovery efforts as communities confront the damage caused by widespread flooding, tornadoes, and power outages.

Severe weather “typically, but not always, results in a reduction in average weekly hours,” according to the Bureau of Labor Statistics.

Hours worked already have been edging down since April 2021. Despite September’s blockbuster hiring—254,000 jobs created—average hours worked last month dipped to 34.2 a week from 34.3 in August. This downward trend might make the hurricane effect seem more pronounced.

Moreover, the hurricane pall on hours worked will feed into measures of productivity and hourly wages. These metrics are important indicators of the path of inflation.

Stable wage growth and productivity gains help keep inflation in check. A clouded view of these metrics due to the hurricanes’ impact might make it harder to gauge the economy’s progress on inflation going forward.

A wrench in short-term measurement

Both BLS non-farm payrolls data and the ADP National Employment Report base their job estimates on a reference week that includes the 12th day of the month. Hurricane Helene landed after the reference week in September; Hurricane Milton hit the Florida coast during the reference week in October.

The ADP National Employment Report counts the number of people employed by establishments that use ADP payroll systems. The BLS uses a monthly survey to report the number of people who were paid by establishments, not just employed.

Though these two data sets show similar trends over time, the differences in their underlying data might lead to a divergent trend in October. Moreover, it might take BLS longer than usual to survey establishments in regions hit hard by the hurricanes, which could make the first print of government estimates subject to greater revision.

ADP provides weekly data from the previous month, which will help businesses, economists, and policymakers track how the hurricanes affected employment in October.

While it’s an open question how much the regional effects of Helene and Milton will influence national data, we did get a preview in last week’s jobless claims, which jumped from a September average of 224,250 to 258,000 in the first week of October, as Helene recovery was under way.

A bumpier path on inflation

Inflation data released last week showed that the Consumer Price Index edged down in September, but by less than economists expected. Headline inflation rose 2.4 percent, compared to an estimated 2.3 percent. Core inflation, which measures inflation stripped of volatile food and energy prices, is up 3.3 percent over the last 12 months, a tick up from 3.2 percent in August.

Now comes the puzzle. Weather events can temporarily disrupt the supply chain and lead to higher inflation. Whether inflation rises in the coming months, and how long it might last if it does, is difficult to guess. Core inflation ticked up before the hurricanes, but we will have to see whether flooding, power outages and work stoppages boost future inflation.

My take

Historically, even extremely damaging weather events have inflicted only temporary pain on the national economy. However, the timing of this season’s hurricanes, on the heels of a blockbuster September jobs report and nearly aligned with a Federal Reserve rate cut, make deciphering the current state of the economy a challenge.

Economists sometimes blame the weather when their predictions don’t pan out. But what economists get right is that we don’t base economic trends on one or two data points.

October data is bound to be messy. Give the clouds time to clear before coming to any conclusions about the economic outlook for the last three months of 2024.

The week ahead

Thursday: Retail sales is the number to watch this week. Retail data from the Census Bureau tends to be soft in September as consumers prepare for the holiday shopping season. However, a sharp decline could signal weakness. Retailers typically collect about one-fourth of their annual revenue in the last three months of the year.

What will get less attention this week is the Federal Reserve’s industrial production and capacity utilization report. Anyone trying to assess what’s in store for manufacturers in the final three months of 2024 can’t ignore this data. Capacity utilization, a measure of manufacturing efficiency, has been running about 2 percent below its historical average. An increase would spell good news for the economy.

Friday: Residential construction data rounds out the week. Single-family housing starts were up almost 5 percent in August from a year ago. A continued growth spurt, fueled by falling mortgage rates, would be a welcome development in the affordability- and supply-challenged housing market. It would mean good news on the inflation front, too.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

German companies are finding it increasingly difficult to obtain funding, according the Munich-based think-tank, the IFO Institute.

The group's Credit Constraint Indicator, which measures firms' access to bank loans, was reported to be at its highest level in seven years on Monday.

More specifically, 32.9% of around 2,000 surveyed businesses reported restrictive behaviour on the part of banks in September. That's up from 27.1% in June.

Looking at results across sectors, the index rose sharply among service providers (from 27.0% to 35.7%) and among industry (from 26.2% to 34.3%).

Professor Klaus Wohlrabe, senior economist at the IFO said: "A lack of orders in many sectors is causing banks to take a closer look when performing credit checks. Since companies in Germany are currently investing little, it would be good if they could obtain loans more easily."

Some sectors claimed it was nonetheless easier to secure funding in September.

The indicator for construction companies dropped (32.2% to 20.7%), as did the total for wholesale businesses (24.6% to 23.2%), and retail (30.0% to 27.0%).

The prospect of ECB cuts

Benjamin Born, professor of macroeconomics at the Frankfurt School of Finance & Management told Euronews Business: "The German economy has been stuck in a prolonged slump for over a year. There is significant uncertainty surrounding both short - and long-term business models, and this creates a vicious cycle."

He added: "Firms are hesitant to invest and banks are equally cautious about lending. A glimmer of hope lies in the anticipation that the European Central Bank (ECB) will continue to ease monetary policy on Thursday and potentially into the following year, which could help improve financial conditions."

When firms struggle to access bank loans, this limits business investments and job creation - which can negatively affect economic growth.

If the ECB decides to cut interest rates at this Thursday’s meeting, loans will become more affordable for firms.

Added to this, lower borrowing costs can stimulate economic activity and business success, creating a safer lending environment for banks.

A risky lending environment

Last week, Germany's economy minister Robert Habeck announced that the economy is expected to shrink by 0.2% this year, marking the second consecutive year of contraction.

While Germany was hit hard by Europe's energy price spike and a weak Chinese economy, its current woes can also be blamed on more long-term, structural challenges.

In particular, the country's infrastructure is lacking, its population is ageing, and productivity is restricted by excess red tape.

"In the current economic context, it is of little surprise to see banks constrain credit supply to companies in Germany," said Matthias Meier, Assistant Professor of Economics at the University of Mannheim.

"In the absence of stabilisation policy, economic contractions coincide with increased corporate credit default, putting banks in a difficult situation and explaining their constrained credit supply."

Meier told Euronews Business that debt refinancing could also make lending riskier by making firms more vulnerable - as many companies will see repayment costs rise on existing loans.

"Another factor is the large amount of long-term debt that was built up over the long period of historically low interest rates preceding 2022. Much of this debt will come due in an environment with substantially higher interest rates," he explained.

Source: Euronews

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

FOREX.com

Economic

Forex

GBP/USD rises above 1.3050 after mixed jobs data

The pound is rising after UK unemployment unexpectedly slipped to 4%, down from 4.1%, and as wage growth eased to 4.9%, down from 5.1%, in line with analysts' expectations.

The data adds to evidence that pay pressures in the economy are easing and also supports recent industry surveys suggesting that employers had put hiring on hold ahead of this month's budget as they look for more certainty over government policy on tax and spending.

The data also points to an ongoing decline in job vacancies, which fell over the past quarter to 841,000, which is just above pre-pandemic levels.

The data support the Bank of England's decision to continue cutting interest rates in November after reducing them by 25 basis points in August.

Policymakers have said they want to see clear evidence that pay pressures, which had been driving service sector inflation, are easing before they cut interest rates again.

Meanwhile, the US dollar is easing, although it continues to hover around a 2.5-month high, supported by the view that the Federal Reserve will cut interest rates at a slower pace than initially expected.

Fed governor Waller central bank should be more cautious about cutting rates ahead. There is no high-impacting U.S. economic data due to be released today.

GBP/USD forecast – technical analysis

GBP/USD continues to trade below its 50 SMA at 1.031, which acts as near-term resistance. Buyers need to break above here and last week’s high at 1.3135 to extend gains towards 1.32 and 1.3260.

Sellers will look to take out last week’s low of 1.3220 to test 1.30. Sellers must take out the key 1.30 support to create a lower low and expose the 100 SMA at 1.2950 and the rising trendline support at 1.29.

GBP/USD, DAX Forecast: Two Trades to Watch_1

DAX rises to fresh record highs

Optimism over rate cuts boosts the DAXGerman ZEW economic sentiment is expected to improveDAX rises towards 20k

The DAX opened higher, reaching a record level after staying at a record high yesterday and following another record close on Wall Street.

Optimism about a lower interest rate environment is helping to boost stocks higher. The ECB is expected to cut interest rates by 25 basis points later this week, marking the third rate cut since June. Meanwhile, the Federal Reserve is also expected to continue cutting interest rates, albeit at a slower pace than initially expected. Still, the prospect of lower borrowing costs is supportive of stocks and sentiment.

Meanwhile, Chinese stimulus has been another supporting factor although there are some questions over whether the stimulus announced will be sufficient to lift Chinese GDP back to the 5% target. Over the weekend, the Finance Ministry was underwhelmed with the latest stimulus announcement, leaving out key facts such as the size and timing of the measures.

Today, attention is back on the eurozone economic calendar, with ZEW economic sentiment expected to increase to 10 in October from 3.6. Improving sentiment towards the German economy could lift the DAX higher.

DAX forecast – technical analysis

The DAX has risen above the 19495 September high, breaking to fresh record levels. With blue skies above, buyers will look to 20,000 on the psychological level.

Immediate support is at 19,495, and below here, 19,000 comes into focus, with a break below here creating a lower low. GBP/USD, DAX Forecast: Two Trades to Watch_2

GBP/USD, DAX Forecast: Two Trades to Watch_2

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Alex

Economic

In the latest CPI inflation print (released on 10 October), US CPI inflation was coming in a tad hotter than expectations, UOB Group’s economist Alvin Liew notes.

Headline and core CPI above expectations in September

“US CPI inflation was a tad hotter than expectations as headline CPI rose by 0.2% m/m, 2.4% y/y in Sep (August: 0.1% m/m, 2.5% y/y). Despite the miss, it was still the slowest since Feb 2021. But core CPI continued to accelerate as it rose by 0.3% m/m (same pace as August) while compared to 12 months ago, it picked up pace to 3.3% y/y (August: 3.2%). Shelter and food costs were key factors driving headline CPI, offsetting the decline in energy costs, while core services inflation accelerated on a plethora of items, including pricier non-housing services.”

“We still expect US inflation to ease but admittedly near-term challenges are clearly present. We keep our headline CPI forecast to average lower at 2.9% in 2024 (compared to the 4.1% recorded in 2023). While core inflation may also ease, it is now likely to average 3.4% in 2024 (from previous forecast of 3.3%). It is still a significant moderation from the 4.8% average in 2023 but remains well above the Fed’s 2% objective. Our 2025 headline inflation and core forecast are both now at 2.0%.”

“September’s jumbo 50 bps of rate cut increasingly looked to be oneoff and Fed likely to continue to ease but at a gradual pace. The not-so-cool September core CPI certainly dialed back those more aggressive expectations of Fed rate cuts but it probably was not hot enough to grind the Fed to a pause. If anything, it will imply gradualism for the Fed in its pace of easing. We still expect the Fed to continue the rate cut cycle in the remaining meetings this year, with 50-bps cuts for the remainder of 2024 (i.e. two 25-bps cuts, one each in November 24 and December 24 FOMC).”

Source: FXSTREET

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Justin

Economic

EUR/GBP continues to lose its ground for the third successive day, trading around 0.8350 during the European session on Tuesday. The EUR/GBP cross remains subdued following the release of mixed employment data from the United Kingdom (UK).

The UK ILO Unemployment Rate fell to 4.0% in the three months leading up to August, down from 4.1% in July and below the market forecast of 4.1%. Employment Change for August saw a notable increase of 373,000, up from 265,000 in July. Meanwhile, Average Earnings excluding Bonuses grew by 4.9% year-on-year for the same period, meeting expectations but slightly below the 5.1% growth registered in July.

Traders will likely focus on a series of key economic data from the United Kingdom, set to be released on Wednesday, including the Consumer Price Index (CPI), the Producer Price Index (PPI) and the Retail Price Index. These data releases could influence the Bank of England's (BoE) policy outlook. However, BoE officials have indicated that they may resume rate cuts at the upcoming meeting in November.

In the Eurozone, France's Consumer Price Index (CPI) fell by 1.2% month-over-month in September, following a 0.5% increase in August. This marks the sharpest monthly decline in prices since the series began in 1990. Year-on-year, inflation rose by 1.1%, down from 1.8% in August, primarily driven by significant drops in energy prices and a slowdown in service costs.

In Spain, annual inflation stood at 1.5% in September, the lowest level since March 2021, down from 2.3% in the previous month. Monthly inflation decreased by 0.6% in September, as expected, while annual core inflation also fell by 2.4%.

According to the October 2024 Bank Lending Survey (BLS), euro area banks noted the first negative impact of the European Central Bank's (ECB) interest rate decisions on their net interest margins since the end of 2022. Meanwhile, the effects on volumes of interest-bearing assets and liabilities continued to be negative.

Source: FXSTREET

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

S&P Global Inc.

Economic

Emerging market economic growth decelerated again at the end of the third quarter, according to S&P Global's PMI surveys. While growth remained relatively broad-based with both manufacturing and service sectors remaining in expansion, the slowdown of manufacturing output growth to near-neutral levels will be worth monitoring. This is especially with forward-looking PMI indicators signalling the potential for manufacturing sector conditions to further moderate.

Turning to prices, cost pressures eased for emerging market businesses including for both goods producers and service providers in September. While selling prices therefore rose at a slower pace as a result of lower cost pressures, it also reflected the reduction in pricing power as emerging market businesses grapple with heightened competition amid lower demand.

Emerging markets continue to lag developed economies' growth

The PMI surveys compiled globally by S&P Global found that rate at which output expanded across the emerging markets collectively slowed for a fourth successive month. The GDP-weighted Emerging Market PMI Output Index fell to 51.1 in September, down from 52.1 in August. This is the lowest reading seen since October 2023, but nevertheless extended the sequence of growth that commenced in January 2023.

While developed markets also grew at a slower rate, it retained the lead upon emerging markets for a third straight month and to the widest degree since May 2022.

Emerging market manufacturing output growth softest since October 2023

September's global growth was supported primarily by the service sector in September, but both the manufacturing and service sectors continued to expand for emerging markets. This marked the twenty-first successive month of broad-based expansion for emerging markets. That said, the respective rates of expansion slowed across both sectors, with manufacturing output growth notably sliding to the softest in 11 months and was only marginal.

India maintains smallest lead so far in 2024

By economies, only three of the four major emerging market economies expanded at the end of the third quarter with Russia sliding into contraction after two successive months of growth. Mainland China's expansion was meanwhile the shallowest in 11 months, with both manufacturing and services activity rising only marginally in the latest survey period.

On the other hand, Brazil's expansion sped up in September with output rising solidly across both manufacturing and services. Services expansion was especially sharp with underlying demand conditions improving for the sector.

Finally, India remained the fastest growing of the four major emerging market economies. However, India's expansion decelerated to the slowest since last November with both manufacturing and service sector growth easing, albeit remaining steep overall. The slowdown in India's expansion coupled with catch-up by Brazil had therefore resulted in the smallest lead in the year-to-date for India ahead of the second-fastest growing BRICs economy.

Emerging market manufacturing sector forward-looking indicators hint at softening of conditions ahead

While emerging markets remained in broad-based expansion at the end of the third quarter, forward-looking indicators, especially for the manufacturing sector hint at potential softening of conditions in the coming months. Specifically, incoming new business rose at the slowest pace in the current 21-month growth sequence after decelerating for a fourth consecutive month. The softening of demand growth was attributed to both a slowdown in services new business expansion and the first reduction in manufacturing new orders in 14 months. Additionally, the rate of manufacturing new orders decline was the joint-sharpest in nearly one-and-a-half years with export orders notably falling for a second straight month.

Meanwhile, future output expectations also reflected reduced optimism among emerging markets firms, with businesses being the least upbeat since the initial pandemic period in May 2020. While the slowdown in new orders was concentrated in the goods producing sector, optimism levels across both manufacturing and services had declined to over four-year lows. These forward-looking PMI indicators had therefore signalled that further easing of growth conditions may be anticipated for emerging markets in the coming months.

Selling price inflation at 17-month low

Additionally, the softening of overall new business growth had also affected pricing power among emerging market businesses. Average selling prices increased at a rate that was only marginal and the slowest since April 2023. This contrasted with the trend for developed economies where charge inflation climbed to a three-month high in September.

Although the softening of emerging market output prices partly reflected goods-driven easing of cost pressures, anecdotal evidence also pointed to heightened competition, such as in India, and interests among emerging market firms to support sales as intents for firms to raise selling prices at a slower pace.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Daily News

Remarks of Officials

Central Bank

Forex

FastBull Events

FastBull Featured

Devin

Mohammad Omar

Recent Searches

Top Searches

Markets

News

Analysis

User

24/7

Economic Calendar

Education

Data

Oil Prices May Climb Higher Amid Risk of Middle East Supply Disruptions

How much could oil prices rise in a supply disruption?

Will demand from China increase oil prices?

Helene, Milton, and the Economy: What to Expect

A drop in hours worked

A wrench in short-term measurement

A bumpier path on inflation

My take

The week ahead

German Companies Struggle to Secure Loans as Economic Uncertainty Persists

The prospect of ECB cuts

A risky lending environment

Source: Euronews

GBP/USD, DAX Forecast: Two Trades to Watch

GBP/USD rises above 1.3050 after mixed jobs data

GBP/USD forecast – technical analysis

DAX rises to fresh record highs

DAX forecast – technical analysis

US: Troubling Core CPI in September – UOB Group

Headline and core CPI above expectations in September

Source: FXSTREET

EUR/GBP Trades Around 0.8350, Holds Losses after Key Data From Both Economies

Source: FXSTREET

Emerging Market Economies Expand at Slowest Pace in Nearly a year

Emerging markets continue to lag developed economies' growth

Emerging market manufacturing output growth softest since October 2023

India maintains smallest lead so far in 2024

Emerging market manufacturing sector forward-looking indicators hint at softening of conditions ahead

Selling price inflation at 17-month low

Risk Disclosure