By Samer Hasn, Senior Market Analyst at XS.com
WTI crude front-month futures closed above $111 / bbl, the highest closing on record since 2014. Meanwhile, ICE Brent closed above $109 /bbl.
Yesterday’s significant surge in oil prices occurred amid growing market pessimism driven by Donald Trump’s contradictory statements, which indirectly imply that a quick resolution to the war in the Middle East is unlikely, despite what they may suggest.
Amid this atmosphere of extreme pessimism and uncertainty about the future, the light WTI crude managed to surpass the heavier Brent crude due to extreme backwardation and a mismatch between futures contracts’ delivery schedules.
Heightened volatility regarding future pricing and the physical integrity of Middle Eastern pipelines has driven massive demand for spot and prompt-month crude oil contracts, significantly outstripping interest in longer-term settlements. This intense preference for immediate physical delivery has driven the market into a state of extreme backwardation. Compounded by the fact that active NYMEX WTI contracts specify May delivery while ICE Brent contracts specify June, this dynamic has heavily favored the U.S. benchmark.
Trump spoke again yesterday about the imminent end of the war and his claim of a crushing military victory over Iran, among other things. His statements were met only with a further sharp rise in oil prices, contrary to what Trump had hoped for. It seems the market has become fully aware that his words are meant solely to manipulate market movements, especially at critical times.
We await the consequences of a US ground intervention aimed at seizing uranium. This phase would be the next stage of escalation and could prompt Iran to intensify its attacks on energy infrastructure and other targets in the Middle East.
This comes at a time when Trump’s statements and even his entire conflict have faced widespread criticism and skepticism, both within the military establishment and abroad. French President Emmanuel Macron expressed deep frustration with President Trump’s approach to the Iran conflict, urging him to stop contradicting himself every day. Trump’s aggressive language, including threats to bomb Iran back to the Stone Age, failed to calm global concerns.
In any case, Trump has failed to achieve any of his set war aims, whether it be regime change in Iran, the complete dismantling of its nuclear and missile programs, or even the later goal of securing the Strait of Hormuz. This makes withdrawing from the war humiliating for Trump now, which forces him to stay involved longer, a fact the market also sees.
Looking ahead, this rise in prices could be reversed early next week if today’s US labor market data are weak, signaling an economic slowdown even before the full impact of the Middle East conflict is felt. However, any major escalation of the war over the weekend, which the US is likely to use to avoid severe market reactions, could reduce the impact of negative economic surprises.
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