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Crude oil closed with its second straight weekly loss, as the risk premium from the Israel-Hamas war has dissipated with the conflict remaining contained, returning focus to signs of soft demand.
Recent data showed U.S. oil stockpiles rising in the past week and China factory activity unexpectedly moving back into contraction last month.
Data released Friday showed U.S. job growth slowed more than expected in October, which added to the perception that the Federal Reserve’s cycle of interest rate hikes may have come to an ned, but “it has weighed on crude oil, with a weaker economy meaning softer demand,” Oanda analyst Craig Erlam said.
In the options market, the call skew – a measure of the relative value of bullish call options compared to bearish put options – for WTI and Brent have weakened, as traders who piled into the options market to profit from any war-induced rally are rapidly exiting the trade, Bloomberg reported.
“However, even if there is only a minuscule chance of the whole Middle East powder keg explosion, the minuscule [chance] is too big when religion is stoking the narrative,” SPI Asset Management’s Stephen Innes said.
For the week, front-month Nymex crude (CL1:COM) for December delivery ended -5.9% to $80.51/bbl, and front-month January Brent crude (CO1:COM) closed -4.8% to $84.89/bbl, down 9.2% and 7.9% respectively over the past two weeks.
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Crude prices could rise to more than $150/bbl if the Middle East conflict escalates, the World Bank warned this week in its latest Commodity Markets Outlook.
Under the bank’s baseline forecasts, overall commodity prices are predicted to fall 4% in the next year, with Brent oil prices dropping to an average of $81/bbl, down from a projected $90/bbl in the current quarter, as economic growth slows.
But the report said a prolonged Middle East conflict could spark sharp increases in energy and food prices in a “dual shock” for commodity markets still reeling from Russia’s invasion of Ukraine.
The energy stock sector, represented by the Energy Select Sector SPDR Fund (XLE), finished +2.4% this week.