Energy markets remain on edge ahead of the U.S. midterm elections, beholden to concerns of escalation before or after the November 3 event horizon.
That’s what Macquarie strategists, including Macquarie Energy Strategist Walt Chancellor, said in an oil and gas report sent to Rigzone late Tuesday.
“We surely won’t call this concern (which we believe has largely driven recent crude price strength) irrational, but it does come in the face of considerably improving oil fundamentals,” the strategists said in the report.
The Macquarie strategists highlighted in the report that the “operative fundamentals” in their view remain “resilient flows out of the Middle East and Strait of Hormuz despite increasing vessel strikes” and “greatly improving oil balances as a function of … [the prior], with global inventory draws appearing to have largely ceased in recent weeks”.
“Perhaps heightened focus on these oil-specific factors is myopic, mere noise around the broader conflict dynamic that remains the core signal,” they noted.
“Likewise, movement of U.S. military assets into the region and U.S. diplomats out of the region highlights the very real risk of escalation,” they warned.
The strategists went on to state that, while they have grown “increasingly comfortable” in assessing a Middle East “stuck in the ‘gray zone’ of neither all-out war nor unfettered trade through the Strait”, energy markets “seem to be looking for more black and white, war and peace answers”.
Outlining their thoughts on the escalation dynamic in the report, the Macquarie strategists revealed that escalation from the U.S. prior to the midterms would surprise them.
“Inflation/energy costs remain a key election issue, and U.S. President Trump has made great efforts to rein in diesel price impacts,” the strategists said.
“While nothing can every truly be ruled out with Trump, it’s not unreasonable to take him at his word on the matter of not attacking Iran before the midterm elections,” they added.
The strategists added that, even after the midterms, the “apparent urgency for renewed strikes on Iran” does not seem “entirely clear” to them.
“Of course, we are approaching this question from an energy market lens, wherein the current ‘Economic Warfare’ framework seems to be achieving a measure of success in restoring U.S. leverage over Iran,” they said.
“Iran remains blockaded, unable to ship oil, while the U.S. has been able to restore Hormuz flows to an acceptable level despite Iran’s ongoing attacks on shipping,” they added.
“In turn, Iran has been forced to broaden its targeting outside the Strait, which we view as a tacit admission of lost leverage over the chokepoint itself,” they continued.
“With Middle East flows just now beginning to sustain at levels sufficient to halt global inventory draws, an abrupt swing back to heavy fighting would seem to undermine these efforts,” they went on to state.
Economic Warfare Strategy
The strategists highlighted in the report that, “from its inception”, they have doubted that the ‘Economic Warfare’ strategy would force a decisive outcome with respect to the conflict.
“As such, while impatience with the current strategy might be an explanation for a theoretical pivot back to large-scale military options, its slow, grinding nature should not come as a surprise,” they said.
The strategists also noted that, “while the U.S./Israel may still aim for farther-reaching political objectives from the war, absent those outcomes, resolution of the conflict may ultimately fall on diplomacy, no matter how flawed it proves”.
“Again, at the risk of viewing geopolitics with too much of a commodity focus, leverage over energy markets (flows, balances, prices) would seem to be a key input in any negotiation scenario that could emerge,” they said.
“In re-opening heavy fighting (and even targeting Iranian energy infrastructure, as press reports have suggested), the U.S. would seem to be imperiling progress made to date in the Strait, as well as inviting reprisals on energy infrastructure throughout the region,” they highlighted.
“Even theoretical ‘escalate to de-escalate’ scenarios would seem to invite this risk, as calibration of strikes could be difficult to achieve given the stakes involved and recent history between the U.S. and Iran,” they warned.
Energy markets appear to be taking the acute risk of escalation quite seriously, according to the strategists, who pointed out that Cal ‘27 WTI moved up “sharply” in the past month, and that front-month crude was close to recent highs.
“Oddly, this has coincided with the oil market finally reaching a degree of balance after a long period of steep inventory draws,” they said.
“While we would view this as a key indicator regarding the potential for a sustainable restoration of balance to the global oil market even if the conflict remains unresolved, the market seems to disagree,” they added.
“Although correlating short-term price moves to underlying assumptions on oil fundamentals can be a fruitless endeavor, one might conclude that markets are saying that the current state of oil flows from the Middle East is ‘as good as it gets’,” they noted.
“We would take the other side of this conjecture, given steady progress achieved by the U.S. in strong-arming flows through the Strait since May,” they stated.
“Likewise, while Saudi infrastructure/supply would appear to remain at risk from Houthi strikes, this is somewhat offset by the potential for diplomatic breakthroughs with respect to the region broadly,” they continued.
The Macquarie strategists concluded their report by noting that they think a “degree of humility” is merited in assessing potential action from the United States.
“Put simply, among the largest policy issues throughout the second Trump administration, the bias has been towards a greater magnitude of action than anticipated by the market (trade, Venezuela, Iran),” they highlighted.
“As such, our perspectives on what is a ‘likely’ or ‘reasonable’ outcome with respect to escalation with Iran need to be heavily qualified, and we can understand the market’s apparent edginess around the prospect of renewed fighting,” they said.
Rigzone has contacted the White House, the Israeli Ministry of Foreign Affairs, and the Iranian Ministry of Foreign Affairs for comment on Macquarie’s report. At the time of writing, none of the above have responded to this Rigzone request.
SC Expects Oil Price to Remain Elevated
In a separate report sent to Rigzone by the Standard Chartered Bank team yesterday, Standard Chartered Bank Energy Research Head Emily Ashford outlined that the company’s “core view” is that they expect crude oil prices to remain elevated over the coming months, “with the pace and durability of Gulf supply recovery the principal drivers of market balances”.
“The restoration of some crude exports has eased the immediate shortage, but disrupted production, constrained refining activity and costly shipping alternatives continue to limit effective supply,” Ashford said in the report.
“Refined products remain particularly exposed, with diesel availability and freight costs adding to inflationary pressures beyond the crude market,” Ashford added.
The Standard Chartered Bank Energy Research Head noted that diplomatic engagement offers a potential route to lower geopolitical risk premiums but warned that “sustained price relief will require greater confidence in the security of maritime transit and the restoration of physical flows”.
“Meanwhile, strategic stock releases and alternative trade arrangements can help bridge the shortfall but cannot indefinitely substitute for disrupted supply,” Ashford pointed out.
“We therefore expect prices to remain volatile and sensitive to developments in the Gulf, with any initial diplomatic-driven decline potentially outpacing improvements in underlying balances,” Ashford stated in the report.
“A durable move lower will depend on both reduced disruption risk and a sustained recovery in production, exports and refining activity,” Ashford added.
In this report, Ashford pointed out that Brent blend for December delivery settled at $115.81 per barrel on October 26, which the Standard Chartered Bank representative highlighted was a week on week rise of $6.26 per barrel, or 5.71 percent.
The front-month contract reached a near-six-month high of $117.45 per barrel on October 23, Ashford highlighted, adding that the next “key level” to the upside was the 52 week high of $126.41 per barrel which was set at the end of April.
“Dated Brent (the physical benchmark) settled at $120.16 per barrel, with its week on week rise exceeding that of the futures contract, up $8.60 per barrel week on week,” Ashford noted.
Ashford also highlighted in the report that the spread between Brent and WTI continued to widen over the week.
“WTI settled at $101.76 per barrel on 26 October, down $1.90 per barrel week on week, and widening the Brent-WTI spread towards $14 per barrel,” Ashford said.
Oil Prices Recovering
In a market analysis sent to Rigzone on Wednesday, Naeem Aslam, CIO at Zaye Capital Markets (ZCM) noted that oil prices were recovering today “as renewed Middle East supply concerns outweigh some of the optimism surrounding potential diplomatic progress”.
“The latest previously verified market quotation places Brent crude at $115.36 per barrel, up $1.48 or 1.30 percent, while West Texas Intermediate trades at $101.12, gaining $1.22 or 1.22 percent,” he pointed out.
“This follows Tuesday’s decline, when Brent settled at $113.88, losing $1.93 or 1.8 percent, and WTI closed at $99.90, down $1.86 or 1.83 percent,” he added.
“At Zaye Capital Markets, we observe that oil prices are responding to two competing developments: expectations of increased global supply and persistent threats to Middle Eastern energy infrastructure,” he continued.
Aslam warned that the broader geopolitical and production outlook continues to create substantial uncertainty for global crude oil prices.
“President Trump’s comments concerning improved shipping flows through the Strait of Hormuz and potential de-escalation with Iran could reduce the geopolitical risk premium if supported by sustained improvements in tanker traffic and regional security,” he said.
“However, renewed threats to energy infrastructure could quickly reverse this sentiment, particularly if disruptions affect major exporters or critical maritime shipping routes,” he added.
Aslam pointed out in the analysis that yesterday’s economic releases reinforced a mixed outlook for global oil demand, with stronger industrial activity contrasting against signs of moderating business investment. He projected in the report that today’s economic calendar introduces several potential catalysts capable of influencing Brent and WTI crude oil prices, noting that official U.S. petroleum inventories and the Federal Reserve’s monetary policy decision representing the most important developments.
“Expectations for the government crude inventory report center on a modest withdrawal of approximately 300,000 barrels following the previous 3.061 million barrel decline,” he said.
“A larger than forecast inventory draw could reinforce supply concerns and support oil prices, particularly if gasoline and distillate inventories also decline,” he added.
“Conversely, an unexpected crude inventory increase could trigger renewed selling pressure, especially if refinery utilization weakens or fuel demand indicators deteriorate,” he continued.
“The Federal Reserve is also expected to maintain its benchmark interest rate at 3.75 percent to 4.00 percent, making the policy statement and press conference decisive for dollar strength and future energy demand expectations,” he went on to state.
Aslam noted that more hawkish guidance could strengthen the dollar, increase financing costs, and pressure crude prices, while a dovish outlook could support oil through expectations of stronger economic activity and lower borrowing costs.
“The UK’s Annual Budget Release and Autumn Forecast Statement may also influence global energy-demand expectations through their implications for economic growth, taxation and business investment,” Aslam highlighted.
“At ZayeCapital Markets, we believe Brent’s recovery above $115 and WTI’s return above $100 reflect a market that remains highly sensitive to geopolitical developments rather than a confirmed improvement in consumption fundamentals,” Aslam said.
“Our central assessment is that oil prices could remain elevated while Middle Eastern supply risks persist, but sustained diplomatic progress, additional Venezuelan exports, and weaker global demand could gradually reduce the current risk premium,” he added.
Rigzone has contacted the White House and the Iranian Ministry of Foreign Affairs for comment on Aslam’s statement. At the time of writing, neither has responded to this Rigzone request.
To contact the author, email andreas.exarheas@rigzone.com
