- Oil and gold face potential price volatility amid diplomatic efforts to address the Middle East conflict and humanitarian concerns
- Brent crude and the spot price of gold have seen significant fluctuations due to the ongoing conflict, with market sentiments shifting in response to diplomatic initiatives
- On the technical chart, the two commodities look poised to move in opposite directions
Oil and gold could see sharp price swings this week as the United States and other world powers try to slow the war in the Middle East to bring in humanitarian aid and negotiate the release of Israeli prisoners from Palestinian hold, even as Jerusalem vows to continue its mission of dislodging Hamas from Gaza.
Global crude benchmark Brent climbed to nearly $94 per barrel last week while the spot price of gold breached $2,000 an ounce on contagion fears related to the worst fighting the Middle East has seen in decades.
Both fell in Asian trade on Monday as diplomatic efforts grew over the weekend to contain the conflict between Israel and the Palestinian Islamist group Hamas, although Gaza continued to be bombarded.
Vandana Hari, founder of oil market analysis provider Vanda Insights, said in comments carried by Reuters that there is "some relief in the oil market that Israel is holding off on a planned ground incursion of northern Gaza to negotiate a release of hostages, which opens up a window for diplomacy.”
Added Hari:
"A ground siege is seen as a potential trigger for widening the Israel-Hamas conflict into the Middle East region, the factor behind crude's risk premium over the past fortnight," Hari said.
‘No Ceasefire’, Says Israeli Official
A senior Israeli official, however, told CNN there will be “no ceasefire” in Gaza amid US and Qatari efforts to free more than 200 hostages held there by Hamas. The official said he was “not aware” of US calls for a delay to Israel's expected Gaza ground operation, although he concurred that both Israel and the US want all the hostages released “as quickly as possible.”
“Humanitarian efforts cannot be allowed to impact the mission to dismantle Hamas,” added the official, whose identity was withheld by CNN.
UK-origin Brent for December delivery was down 89 cents, or 1%, to $91.27 per barrel by 14:00 local in Singapore (02:00 New York). Last week, the global crude benchmark showed a gain of 1.4% after the prior week’s gain of 7.5%.
New York-traded West Texas Intermediate, or WTI, crude, also slated for December delivery, was at $87.01, down $1.07, or 1.2%. WTI rose 2% last week, adding to the prior week’s gain of around 6%.
With support for WTI having broken the $87.25 level, which marks the 5-Day Exponential Moving Average, or EMA, the US crude benchmark could “extend its decline to $86.30”, says Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
Potential for US Crude to Retest Lows Prior to This War
For the US crude benchmark to regain upward momentum, it must hold major support at above the 50 day-EMA of $85.30, said Dixit.
“A break below this zone will turn the momentum to bearish with potential for a retest of the 50-week EMA of $81.50.”
Only a consolidation above $87.25 will enable WTI to retest last week’s $89.85 peak, and take on $95 and $96.50.
The spot price of gold was at $1,975.64 an ounce at the time of writing, was down $6.00, or 0.3%. Last week, spot gold reached a session high of $1,997.20, coming within striking distance of the much-watched $2,000 level.
Said Kelvin Wong, senior market analyst in Asia Pacific for online trading platform OANDA:
“The recent three weeks of rally seen in spot gold has been driven by geopolitical risk premium and positive momentum.
“The current short-term uptrend phase of spot gold has reached an ‘overstretched condition’, which increases the risk of a corrective retracement; watch the US$2,006 key short-term resistance.”
In oil’s case, many on Wall Street seem to think crude prices should be higher due the relative proximity of the showdown in Gaza to some of the biggest oil producers, such as Saudi Arabia, the United Arab Emirates, Iraq and Kuwait.
While Israel and Palestine themselves barely register in the global oil trade, the Strait of Hormuz straddling them is a key chokepoint for the movement of crude, where a fifth of all oil passes through its waters.
Also, the almost daily saber-rattling against Israel by avowed Hamas supporter and fifth largest oil producer Iran — and concerns of reprisals against Tehran by the Israelis and their main ally, the United States — has added to concerns that something untoward might happen soon .
No Demonstrable Risk For Oil Trade Yet From This War
Yet, some oil traders see the conflict for what it is — a major political event without doubt, but not one that has shown any demonstrable risk so far to the crude trade.
The crux of it is oil is a commodity that attains its value from demand-related consumption. Unlike gold or the dollar, it’s not a haven to keep benefiting from a mere figment of imagination that supplies are at a risk and, therefore, prices have to keep rising — when the reverse is the case.
That explains the reversal in Friday’s crude rally after news that two prisoners held by Hamas since Oct 7 have been released on “humanitarian grounds”.
While the notion of a regional — even worldwide — contagion from the conflict is valid, it’s also quite a stretch at this point to maintain a near $7 to $10 risk premium on a barrel since the onset of the war — and to keep increasing it with each headline of an escalation in fighting — without commensurate impact on the trade of oil.
The pump prices of fuel in the United States now are perhaps most indicative of how the broader oil trade should be treating this crisis.
The gasoline price paid by US drivers has actually fallen — finishing Thursday at $3.554 per gallon versus $3.867 from a month ago and $3.820 a year ago.
Since crumbling from record highs of more than $5 a gallon in June 2022, gasoline at US pumps have not been able to go much beyond $3.50 due to more than adequate supply and a narrowing refining “crack” — or profit margin. (Read my full take on the topic here).
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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.