The recent surge in oil prices has boosted the global economy. This has allowed several consumers to enjoy higher incomes and increased spending, with the benefits expected to trickle down over time. But, a broader conflict in the Middle East would hurt growth prospects and likely lower oil prices. A war in the region would create more uncertainty about the future international oil supply and demand direction.
The war in Gaza has pushed oil prices back above $80 a barrel, with analysts expressing doubts about whether the Israeli-Hamas conflict will end soon. It is also possible that the war could drag out, weighing on global economic activity and pushing oil prices even higher.
Meanwhile, the broader region faces various security challenges that undermine stability. For example, state failures and ongoing civil wars exacerbate the threats posed by terrorist networks. The region also lacks respect for human rights and the rule of law, creating grievances that can quickly bubble up into more open fighting and coercion.
Fortunately, the Biden administration has opened up new lines of diplomatic communication and made several positive moves to de-escalate tensions. Kuwait and the UAE have re-established their ambassadors to Iran, and Saudi Arabia and Iran have held several important meetings that have led to a thaw in relations.
In a separate development, the United States has dropped its threat to sanction Iran for its ballistic missile program, which it says violates U.N. sanctions. While this move won’t reduce tensions, it will help reassure investors that the United States is not actively seeking to escalate the conflict.
The U.S. Energy Information Administration will release weekly inventory data on Thursday amid these concerns. Last week, API reported that U.S. crude inventories fell by 2.7 million barrels, compared with expectations for a decline of 2.5 million. The agency’s data also showed that gasoline inventories declined by 1.3 million barrels and distillate supplies, which include diesel fuel and heating oil, were down by 3.3 million barrels.
The data could weigh on the market, especially if it shows a larger-than-expected rise in U.S. oil stocks. A strong dollar can also weigh on oil demand by making it more expensive for buyers in other countries to buy the commodity. The dollar index was up on Thursday, having given up some ground it gained a day earlier after a surprise contraction in euro zone business activity data weighed on risk appetite. The dollar’s climb pushed the price of gold lower, with spot gold down $1.20 to $1206.50 a tonne. This was despite data showing that the global economy grew faster than expected in the third quarter. The dollar’s strength also pushed down the price of emerging market currencies, including the Indonesian Rupiah, which was down 1.6% at 1,080. The South African rand was the weakest currency, declining 1.5% at 1.9400 per dollar.