By Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM
What goes up must come down. That famous saying is especially true when discussing the valuation of crude oil this week, with the commodity having declined a whopping 13% since the astonishing 20% climb in prices that made headlines around the world when financial markets resumed trading for the new week.
The main catalyst behind the losses on Tuesday were reports that Saudi Arabia will be able to resume production output close to levels expected prior to the attacks on Aramco production fields last weekend.
While initially met by astonishing surprise from investors who expected the return to capacity would take months, this was later supported by Saudi Energy Minister Prince Abdulaziz bin Salman confirming during a news conference in Jeddah that Saudi oil output will be fully back online by the end of September.
More optimism that production output will return to levels before the drone and missile attacks on Saudi Arabia before the end of September should encourage further declines in oil prices by the end of the week. It wouldn’t be surprising if Brent Crude edges closer to $60 from a current valuation near $64, while WTI Crude can fall as low as $56 from where it trades currently, marginally below $59.
The next focus for investors monitoring the geopolitical environment is the expected press conference from a Saudi Defence Ministry spokesman later on Wednesday. Reports suggest that the press conference will show evidence that Iran was involved in the Aramco attacks, while U.S. Secretary of State Mike Pompeo is also traveling to Abu Dhabi and Jeddah.
If evidence of Iran’s suspected involvement in the attacks on Saudi Arabia is provided and the US Secretary of State warns of repercussions, fears regarding a surge in political tensions in the region will escalate once again. While we have already seen in the past few days how sensitive oil prices can behave to geopolitical developments, if an escalation does flare up in the region, volatility can spread into other asset classes.
I would closely monitor the behaviour of Gold, which has performed with unusually low levels of volatility since the events broke out this past weekend.
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