Oil prices continued their upward trajectory on Monday, marking the fifth consecutive session of gains as the market reacted to easing U.S. recession fears and escalating geopolitical tensions in the Middle East. The ongoing conflict, particularly the brewing tension between Iran and Israel, has become a significant driver of market sentiment, with traders closely monitoring potential repercussions.
Brent crude futures rose to $80.39 a barrel, while U.S. West Texas Intermediate (WTI) crude climbed 88 cents, or 1.2%, to $77.72. This surge follows a more than 3% increase in prices from the previous week, driven by a combination of robust U.S. economic data and the growing anxiety over potential retaliatory actions from Iran.
"Support is coming from last week's better-than-expected U.S. data which eased fears of a U.S. recession," said Tony Sycamore, an analyst at IG Markets. The positive economic indicators have alleviated some concerns about a potential downturn, providing a cushion for oil prices.
However, the geopolitical landscape remains fraught with uncertainty. Iran, alongside the militant group Hezbollah, has vowed to retaliate for the assassinations of key figures-Hamas leader Ismail Haniyeh and Hezbollah military commander Fuad Shukr. The market is on edge, with many experts viewing a retaliatory strike as inevitable. "The market is still waiting for Iran's response," noted Warren Patterson, head of commodities research at ING.
The situation has been further inflamed by Israel's recent military actions in Gaza, including an airstrike on a school compound that reportedly killed at least 90 people. While Israel has disputed the death toll, the strike has drawn international criticism and heightened the risk of a broader conflict.
The recent rally in oil prices also reflects a broader recovery in financial markets. After a period of decline, oil has rebounded alongside equities, buoyed by the prospect of U.S. interest rate cuts. Last week, three U.S. central bankers suggested that cooling inflation could prompt the Federal Reserve to lower rates as early as next month, a move that would likely support economic growth and, by extension, oil demand.
Meanwhile, developments in China also played a role in the oil market's recovery. The country's consumer prices rose faster than expected in July, and U.S. weekly jobless claims fell more than anticipated, further bolstering market sentiment.
On the geopolitical front, Russia has begun evacuating civilians from parts of a second region near the Ukrainian border, following increased military activity by Kyiv. This move comes just days after Ukraine's most significant incursion into Russian territory since the war began in 2022, adding another layer of complexity to the global energy market.
As the week progresses, traders will be closely watching several key reports for further insights into supply and demand dynamics. The Organization of the Petroleum Exporting Countries (OPEC) is set to release its monthly outlook on Monday, followed by the International Energy Agency's (IEA) report on Tuesday. Additionally, U.S. inflation data, due on Wednesday, will be a critical indicator for market participants.
"Geopolitical premia built on the expectations of Iranian reprisal on Israel can only carry the price so far," said Harry Tchilinguirian, group head of research at Onyx Capital Group. "The market needs more hard economic data to hang its hat on and stabilize."
