Oil Market Bipolar Disorder

Brent crude prices dropped down by a marginal 1.0% to $90.33 per barrel. This seems to be a rather correctional wandering amid high volatility in the market. Though, this situation may continue without some changes on the geopolitical and macroeconomic fronts.

The visit of U.S. President Joe Biden to Israel seem to come up short. Zahal, an Israeli army, is preparing for a ground military operation in Gaza strip. At least, we can see many details of the forthcoming operation in the media. Israel is planning to raze Hamas infrastructure to the ground, move all civilians to the south of the strip closer to the border with Egypt and blow up Hamas terrorists’ tunnels’ network below the city of Gaza. The most frightening is that Israel could accept a huge death toll of civilians in Gaza strip in order to wipe out Hamas from the existence. Moreover, Israel seemingly has no plan how to recovery the territory of Gaza strip in the future after the war. 

Other major regional powers has no understanding of the consequences that would follow after Israel’s military actions. The situation may come to many scenarios. Every major player in the Middle East will try to expand its influence in the region. This is a very dangerous situation as the region is responsible for 30% of the overall oil exports. A major destabilization in the Middle East could throw oil prices sky high. Estimates consider Brent crude prices may surge to $150.00 per barrel. This will lead to inflation in the United States at 6-7% YoY, soaring debt yields and world energy crisis. This could become a nightmare reality, as many policymakers are ready to sacrifice the economy in favor of political ambitions in the Middle East. Brent crude prices above $100 per barrel would signal this scenario is put into operation.

On the other hand, if there will be no ground operation in Gaza strip, or it will be a limited invasion rather manifesting the Israeli flag over the region then oil prices may drop towards $55.00-65.00 per barrel amid global economic deterioration. 

China has reported further economic slowdown this week. U.S. Federal Reserve’s (Fed) Beige Book reported that economic conditions are worsening. Seven of the twelve Fed’s regional branches reported either a moderate decline of the economy or zero economic growth. 

Investors are loosely monitoring the U.S. debt market. The U.S. 10-year Treasuries yields rose to new 16-year highs at 4.98%. This prompted further contraction of the yields between two and ten year debt manifesting boldly a nearing recession in the U.S. The U.S. Administration is trying to mitigate possible shocks from the energy crisis. U.S. Treasury has eased sanctions against Venezuela to boost oil and gas exports from this OPEC member state. Additional exports of 200,000-300,000 barrels per day would hardly affect global oil market in 2023. It may have a certain effect if the situation in the Middle East will be resolved.

All this remind more of a bipolar disorder or more like a Strange Case of Dr. Jekyll and Mr Hyde by Robert Louis. The intelligent Jekyll represents a decline of oil prices to $55.00-65.00 per barrel of Brent crude, while a murderous beast Hyde is responsible for crude prices at $150.00 per barrel and unpredicted consequences for the economy that may result in a global turmoil.

Joe Biden has left Israel leaving almost no room for diplomatic fix-up of the Palestinian-Israeli conflict. Israel may launch a ground assault on Gaza strip at any moment soon. So, somebody is waiting for the oil market around the corner. Hopefully, it would not be Mr Hyde.