Rising Middle East tensions cause Oil to spike; Gold gains as ISM disappoints

Summary:

• Oil spikes as Iranian military leader killed

• Can Iran cause another oil shock?

• EIA inventories show huge drop

• Gold gains as ISM disappoints

• Equities slide but bounce off the lows

The positively upbeat mood which marked the start of the New Year hasn’t lasted long as geopolitical tensions have abruptly returned to the forefront of investors’ minds after a US air strike has killed a top Iranian military leader in Baghdad. Qassem Soleimani was assassinated in a targeted attack with a US Pentagon statement accusing the head of the Iranian Revolutionary Guards’ overseas forces of “actively developing plans to attack American diplomats and service members in Iraq.” In response, there’s been a clear market reaction with crude oil rallying over 4% higher, European stocks and US futures falling back and safe havens such as government bonds and precious metals catching a bid.   

A large portion of the move higher can be attributed to concerns surrounding a further escalation and we look at the prospect of that in this piece here. 

The weekly crude oil inventories from the US have shown a bumper drawdown, with the EIA release keeping the markets well supported, not far from 4-month highs and still sitting on gains in excess of 3.5% on the day. The data was as follows:

• Crude oil inventories: -11.5M vs -3.3M exp. -5.5M prior

• Cushing: -1.4M vs -2.4M prior

• Gasoline: +3.2M vs +1.7M exp. +2.0M prior

• Distillates: +8.8M vs +0.6M exp. -0.2M prior

The headlines has shown a huge drawdown but the other components are not quite so positive with the large build in Distillates and Gasoline balancing out the report somewhat. This data takes on a secondary importance at present given the latest developments in the Middle East.

The market reaction to the news was not confined to Oil with clear risk-off moves seeing stocks fall while precious metals, bonds and safe have assets like the JPY all gained. Another boost for Gold came from the ISM manufacturing PMI for December which came in at 47.2 - below both the prior reading of 48.1 and the consensus forecast, which called for 49.0. This marks the 5th consecutive month in contractionary territory for this metric and the 8th time in 9 months that it has come in below forecasts. Gold has moved higher since the release with the precious metal trading less than $10 from its 2019 peak.

It’s been a pretty wild ride for US indices at the start of the year, with a strong ramp into Thursday’s close seeing the major benchmarks end at their highest ever levels. However, there was some weakness noted in the small caps (US2000 on xStation) and an unexpected increase in geopolitical tensions between Washington and Tehran caused some sizable selling overnight and during the first half of the European session. The US500 has recovered just over half of the declines by the European close and how the index trades into the weekend could well set the tone going forward.