Oil Prices Fall 4% on Fed Concerns, Extending Flip-Flop Over War Premium

NEW YORK (Sputnik) - Crude prices tumbled almost 4% on Monday as speculation over the Federal Reserve’s interest rate decision later in the week extended the flip-flop over the war risk premium that oil ought to assign to the fighting going in the Middle East.

Concerns over how US jobs numbers for October will turn out on Friday — and how that might impact the Fed’s next rate decision in December — also kept oil traders on the edge.

New York-traded West Texas Intermediate, or WTI, crude for December delivery, settled at $82.31, down $3.23, or 3.8%. The US crude benchmark has been in yo-yo mode for a week now, rising or falling more than 2% in a session, as the Israel-Hamas war raging on the Palestinian territory of Gaza had markets on the tenterhooks.

Last week, WTI finished down 3.6% and is due to finish October down almost 10% as things stand.

UK-origin Brent crude for December delivery settled at $87.45, down $3.03, or 3.4%. Last week, the global crude benchmark fell nearly 2%. It is on track to end October down 9%.

Israel launched at the weekend its much-anticipated ground assault on Gaza. Israeli troops and tanks attacked Gaza's main northern city from the east and west of the Palestinian enclave on Monday, reports on the war said.

Traders said it would be remiss to say the market wasn’t following the war in the Middle East that erupted on October 7 after Hamas gunmen paraglided into Israel and killed nearly 1,500 Israelis and took some 200 hostage.

But there has also been no disruption to oil traffic in the Middle East — particularly with barrels moving in waters around the battle zone — and, as such, it is hard to maintain a war premium risk for crude just on grounds of proximity, those in the know said.

“As Middle East crude supply concerns ease, demand destruction is happening,” said Ed Moya, analyst at online trading platform OANDA. “This slide in oil prices means that geopolitical angst won't be enough to send prices higher. Too much demand destruction is happening and the oil market is losing its tightness despite all the risks to supply flows that remain on the table.”

In the Federal Reserve’s case, while rates are expected to be kept unchanged at its Wednesday policy meeting for November, officials are mulling another rate hike before the end of the year. That could come at the Fed’s December rate decision, especially after several hotter-than-expected inflation readings. Traders are also wary about the US non-farm payrolls report for October due on Friday. After a blockbuster 336,000 jobs were added in September, economists are expecting more moderate jobs growth of 182,000, which is still consistent with a robust labor market.

The unemployment rate is expected to remain at 3.8%, while wage growth is expected to ease to 4% year-on-year, which would mark a post-pandemic period low, and could help bolster the Fed’s view that price pressures are easing and that it doesn't need to raise interest rates any further, relieving pressure on economic activity in the largest oil consumer in the world.

Ahead of Friday’s data, market participants will be looking at data on third-quarter employment costs on Tuesday for signs that wage growth is moderating. But before the Fed meeting, markets are also awaiting key purchasing managers index data from China, which is set to shed more light on business activity in the world’s biggest oil importer.