WTI crude fell Thursday after U.S.-brokered Israel-Lebanon ceasefire raised hopes of ending the Iran war, but Hezbollah's swift rejection of terms quickly tempered optimism, leaving markets uncertain.
Another day. Another headline.
The headline-driven volatility of crude futures, which has characterized the commodity’s price action since the Iran war started, came to the fore yet again Thursday in the New York session. The latest bearish trigger for oil prices is a new ceasefire deal negotiated between Israel and Lebanon under the U.S. mediation.
In a joint statement released Wednesday following a series of meetings in Washington, the three nations party to the deal said the ceasefire was contingent on a complete cessation of Hezbollah attacks and the evacuation of all Hezbollah operatives from the Southern Litani sector.
Given that Iran had made a Lebanese ceasefire as one of the preconditions to end its war with the U.S., Wednesday’s development raised hopes for an end to the war that has now gone on for 97 days.
Optimism Tempers Amid Skirmishes
Latest reports, however, temper the optimism. Hezbollah, a Shiite militant outfit, however rejected the terms of the agreement, going back on its initial statement that it would abide by a full ceasefire. An Al Jazeera report stated that Israeli drone attacks on a vehicle in southern Lebanon killed several people and wounded many others.
Oil Falls Despite the Uncertainty
Nevertheless, the West Texas Intermediate (WTI) crude futures fell more than 3% early Thursday in the New York session. At one point, the contract dropped below the $92 level, although it has recouped a small fraction of its Thursday’s losses.
ING Commodity Strategists Ewa Manthey and Warren Patterson said Iran and the U.S. are under pressure to strike a deal: “ Every day that passes without a resumption of oil flows leaves the market increasingly vulnerable. This increases the pressure to strike a deal.”
According to the strategists, the oil market is now being cushioned by inventories. Given the likelihood of a slow and gradual recovery in oil flows even in the event of a resolution, they expect inventories to remain tight in the third quarter, posing upside pressure to prices.
Inventories Thin Down
The Energy Information Administration’s weekly Petroleum Status Report released Wednesday showed that the U.S. Strategic Petroleum Reserve (SPR) recorded an 8-million-barrel drawdown week over week (WoW) to 357.1 million barrels in the week ended May 29. From a year ago, the depletion was a steeper 44.7 million barrels.
Oil Shrugs off Dollar Weakness
Oil’s weakness came despite the dollar continuing to grind lower on Thursday, despite the weekly jobless claims report coming in stronger than expected.
A Bureau of Labor Statistics (BLS) report released ahead of the market open showed that the number of individuals claiming unemployment benefits for the first time climbed 13,000 to 225,000 in the week ended May 30, its highest level since February. Volatility associated with the Memorial Day holiday may have distorted the number. The four-week average, which smooths volatility, also increased, although by a much more modest 6,500 to 214,750.