Despite Middle East Turmoil, Oil Prices Are Falling. What Gives?

The Israel-Hamas war is causing horrific destruction and casualties, destabilizing a region that holds a significant portion of the world’s oil reserves. Logic would dictate that fears of supply disruptions would drive crude oil prices higher. But that’s not happening.

To explain this counter-intuitive dynamic, we must examine the macroeconomic environment, which in turn holds clues for the stock market’s likely performance during the latter part of this year and into 2024.

Following the violent incursions by Hamas militants in Israel on October 7, which caused a few days of anxiety and volatility among oil traders, the price of crude has declined.

The per-barrel price of West Texas Intermediate (WTI), the U.S. benchmark, has fallen below both its 50- and 200-day moving averages, denoting a sustained downward momentum (see chart).

The textbooks tell us that war in the Middle East should lift the price of oil, but it ain’t necessarily so.

One reason is that, despite the ferocity and bloodiness of the conflict, the supply of oil hasn’t been seriously disrupted. Risk has risen, but not enough to prompt preemptive buying.

The key is expected demand destruction, caused by decelerating economic growth. The monetary tightening by central bankers around the world is dampening the global economy. Worries about China, the world’s largest oil importer, also come into play. China’s economy has been stumbling, causing analysts to revise downward their projections for oil demand.

The U.S. Energy Information Administration (EIA), in its Short-Term Energy Outlook released November 7, predicted a decrease in gasoline consumption in the U.S. next year due to reduced commuting, more efficient vehicle engines, and the growing adoption of electric vehicles (see chart).

Source: EIA

This bearish sentiment was driving oil prices lower even before the outbreak of armed hostilities in Gaza and it continues to weigh on oil markets, despite risks that the conflict could spread.

It’s also worth noting that Gaza produces no oil, and Israel’s oil production is negligible. To cause a significant disruption in oil supply, the conflict would need to extend to the enormous oil fields in Saudi Arabia, Iraq, or Iran.

Oil production curbs implemented by OPEC+ have kept oil prices from falling further. Last weekend, the cartel’s de facto leader Saudi Arabia announced it would extend its voluntary production cuts of 1 million barrels daily of crude until the end of the year. But cheating on quotas is commonplace among OPEC+ members, and the cartel only has so much power over market forces.

As of this writing Thursday, oil prices were rising but they’ve been on a roller coaster, with a downward bias. The oil patch’s volatility won’t end anytime soon.

The trends I’ve described already are weighing on gasoline prices, just in time for the holiday driving season. Gas prices are plunging around the nation, due to falling demand and the slump in the per-barrel price of oil.

The oil price descent is bad news for energy investors, but good news for consumers and inflation fighters. Elevated oil prices are inflationary; as they decline, so do the odds of another Federal Reserve rate hike.

The CME Group’s FedWatch tool on Thursday put the odds of another Fed “pause” in December at 90.5%.

Expectations that the Fed will soon end its tightening cycle have sparked a stock market rally this month, following a dismal September and October.

On Thursday, the main U.S. stock market indices were trading in the green until Fed Chair Jerome Powell made hawkish comments in the afternoon while sitting on a panel discussion hosted by the International Monetary Fund (IMF). Bond yields rose, and stocks closed lower as follows:

  • DJIA: -0.65%
  • S&P 500: -0.81%
  • NASDAQ: -0.94%
  • Russell 2000: -1.57%

Powell told the IMF confab that the Fed “is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time. We are not confident that we have achieved such a stance.” Thanks to Powell’s uncanny ability to talk down the markets, the S&P 500 snapped its eight-day winning streak.

WATCH THIS VIDEO: Is The Tide Turning for Stocks?

A major factor driving stock market gains so far this month has been the collective feeling on Wall Street that we’ve witnessed peak interest rates (Powell’s dour remarks on Thursday notwithstanding).

Which brings me to the utilities sector.

Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

As you position your portfolio for next year, turn to utilities stocks. The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound when the Fed pivots in 2024. That means value plays are ready for the picking.

However, you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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