Oil futures experienced a decline on Sunday night as the markets reacted to Israel’s launch of a ground offensive in Gaza. This move drew implied threats from Iran and raised concerns about a wider conflict that could disrupt global crude supplies.
According to Stephen Innes, managing partner at SPI Asset Management, the cautious approach taken by Israel has brought some relief to investors, as it suggests that the worst-case scenarios may not materialize. However, he also warns that this situation is likely to be a prolonged and complex affair with many ups and downs.
The West Texas Intermediate crude for December delivery fell 84 cents, or 1%, to $84.70 a barrel on the New York Mercantile Exchange. Similarly, December Brent crude, the global benchmark, was down 92 cents, or 1%, at $89.56 a barrel on ICE Futures Europe.
While oil futures saw a jump of nearly 3% on Friday, they still ended the week with declines, thereby eroding the modest risk premium that had been priced into the market.
In terms of the ongoing situation, it has been reported that Israeli soldiers have moved at least two miles into the Gaza Strip as of Sunday. This ground incursion aims to route Hamas following their attack on southern Israel on October 7 that resulted in over 1,400 casualties and more than 200 Israelis being taken hostage.
U.S. Stock Market Futures Show Upside Potential
U.S. stock-index futures are slightly higher, indicating a positive start for the market. The S&P 500 futures are up by 0.3%, while futures on the Dow Jones Industrial Average have gained 44 points or 0.1%.
Concerns Over Iranian Conflict Impacting Investor Sentiment
Investors are primarily worried about the escalating conflict involving Iran. Since the U.S. withdrew from the nuclear accord with Tehran and reinstated sanctions in 2018, Iran’s crude exports have made a significant recovery. However, a renewed crackdown on Iran could result in a reduction of up to 1 million barrels per day in crude supply. Furthermore, there is a fear that Tehran may threaten critical transportation chokepoints, particularly the Strait of Hormuz, or carry out attacks on infrastructure in the region. These factors could drive up prices due to a fear premium.
Iranian President Accuses Israel of Crossing Red Lines
Ibrahim Raisi, the Iranian President, expressed his concerns on X and accused Israel of crossing red lines that may necessitate action from various parties.
U.S. Strike in Eastern Syria Linked to Iranian Forces
To address the recent attacks on U.S. air bases in the region, U.S. warplanes targeted two locations in eastern Syria that were allegedly linked to Iran’s Revolutionary Guard Corps. The Pentagon confirmed the strikes.
Monthly Losses for U.S. Stocks Likely in October
As October comes to a close, U.S. stocks are expected to register another round of monthly losses. The major contributing factor to this downward pressure has been the surge in Treasury yields. Last week, both the S&P 500 and the Nasdaq Composite entered correction territory, while the Dow is down by more than 2% year-to-date.
Rise in Yields Amid Escalating Mideast Tensions
The increase in yields, which move in the opposite direction to prices, can be attributed to the lack of interest in U.S. government debt as a traditional safe-haven investment. This trend has emerged due to the mounting tensions in the Middle East.