Economic Conditions Outweigh Geopolitical Concerns in Oil Prices

When the war between Israel and Hamas began, crude oil prices spiked due to concern that the conflict would spread to effect Iranian oil production and cause supply disruptions in the region. At the time WTI (Western Texas Intermediate) was trading in the low 80’s and then spiked to just below 90 on 10/20. From there the price has dropped to just above 75 today (11/8).

Why has the price of crude dropped so far and fast?

1. A general demand decline in the US and Western Europe due to a slowing economic climate and a warm winter.
2. China demand is slowing, based on the latest data released yesterday (11/7).
3. The Israel-Hamas war is being viewed as a localized conflict that will not spill over to the broader region. As long as Hezbollah, a proxy of Iran, stays out of the conflict, Iranian oil production and exports seem safe.

In my personal opinion, I think there’s a good chance that Hezbollah will attack Israel and the conflict will, regretfully, expand. If that does happen, crude will rip higher.

However, the chart does not seem to agree with me, at least at this time. For the time being, oil looks like it’s either headed even lower or will stabilize and stagnate in the mid 70’s until there is a catalyst to take it higher.

Oil and gas equities such as CVX, XOM, EOG, COP and most others have gone along with crude for the ride down and, although they seem to be at at attractive levels now, it doesn’t look like they’ll be going higher, fast, any time soon.

Of course, everything could change if the war in the Middle East goes regional. But unless that happens, all the economic and technical signs are pointing to crude staying in the 70’s for the near future.

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