The market is closely monitoring prospects for a diplomatic resolution to the conflict in the Middle East.
Speculators are unwinding some long positions in Brent, but the bulls retain significant cards.
Signals from the diplomatic front remain mixed, though the market appears more inclined toward a conciliatory approach. While mediators are proposing new ways to bring the US and Iran back to the negotiating table, investors are downplaying the impact of US strikes on Qeshm Island. Donald Trump’s comments about cutting military aid to Israel, however, are acting as a catalyst for Brent’s pullback.
Israel’s possible loss of $4 billion in military aid at a time when it needs it most is being interpreted by the market as evidence that the US may scale back its presence in the region. The Republicans believe their defeat was caused by a geopolitical situation that drove up oil prices and fueled inflation.
Investors are more inclined to trust diplomacy, which is narrowing the premiums between grades with immediate and more distant delivery dates. For instance, in early October, Dated Brent was trading at a $30-per-barrel premium to ICE Brent. In November, the difference narrowed to $3.7. Meanwhile, increased oil exports from the Middle East to pre-war levels are reducing transport costs.
In these circumstances, the speculators’ reduction of long positions in Brent appears justified; however, the bulls still have cards to play. According to the American Petroleum Institute, crude inventories fell by 5.3 million barrels. If confirmed by the Energy Information Administration, this would mark the fifth consecutive decline and point to rising demand and supportive prices.
The Republicans’ defeat in the elections does not mean the conflict in the Middle East will not escalate. History teaches a similar lesson. In 2006, both houses of Congress came under Democratic control amid the unpopular Iraq war. In early 2007, however, George W. Bush increased the US military presence in the region, and US troops did not withdraw until 2011.
Tehran claims that Washington’s response to its demands was unsatisfactory. Time remains on the US side. The blockade on Iranian oil is having an effect, while oil supplies from the Middle East are hovering close to pre-war levels. The parties remain far apart, and a breakdown in negotiations would result in a resumption of the Brent rally.
