Output down, prices up – The US-Iran war continues to escalate, which sent Oil prices higher and global Stocks lower on Thursday. Iraq has cut its Crude output by 1.5 million barrels per day due to storage and export issues, and some commodity-linked refineries in the Middle East, China and India have shut down their operations because of the conflict. As a result, WTI pushed above $80 a barrel yesterday, its highest level since July 2024. Looking at Wall Street, the Dow Jones plunged by almost 900 points (1.62%) the same day. Leaving aside the war and its collateral effects, investors will temporarily shift their focus to today’s US Nonfarm Payrolls data, which could offer fresh clues about the Federal Reserve’s interest rate plans.
Why it matters
Oil spillover – The latest developments in the Gulf point to a possible Crude supply crunch, and that would send prices even higher. We are seeing production cuts, and restarting supply will take time, raising the risk of a shortage that could have severe ramifications for the global economy. The conflict in the region has spilled over as Iran has attacked the United Arab Emirates, Bahrain, Kuwait and Qatar. Moreover, the sinking of an Iranian warship by a US submarine off the coast of Sri Lanka earlier this week has raised security and economic risks for countries across the Indo-Pacific.
What’s next
Shaky sentiment – Energy prices appear headed higher next week, barring some de-escalation in the Gulf. Wall Street is under pressure, but investors don’t seem to be in panic mode so far. The next market moves will be at the mercy of developments in the conflict, as well as key US economic data such as the US employment report due later today. If Nonfarm Payrolls data comes in below consensus, it would support the case of lower rates by the Federal Reserve, weighing on the US Dollar and underpinning Gold and Stocks as an immediate reaction. On the contrary, a significant upside surprise would encourage the bank to continue delaying interest rate cuts, benefiting the US Dollar at the expense of Gold and Stocks.