By Naeem Aslam
Wednesday is not your typical ADP morning, which usually drives the price action. In fact, US and European stock futures are very much looking at a scenario under which there could be material disruption to oil supply due to Iran’s attack on Israel.
Traders typically discuss the second most important data of the day, the US ADP, but now, everyone’s focus is solely on the escalation of tensions in the Middle East and its potential impact on all aspects of life
There is no doubt that after the recent retaliatory attacks by Iran on Israel, the main concern for traders is the Iranian crude oil, gas, and nuclear structures. More importantly, what traders are looking at is a potential situation under which Iran’s oil structure faces major disruption, and we see oil prices shooting to the sky.
While no one desired an increase in tensions in the Middle East, it’s evident that all diplomatic efforts, regardless of their value, have yielded no results. This escalation has increased the likelihood of a wider conflict in the region, which could easily occur if Iran’s allies, particularly Russia, start to support the country.
Vladimir Putin has fully backed Tehran, despite Russia’s ongoing war with Ukraine and the West. More importantly, Qatar’s support will play the most influential role here, as Iran has a very close relationship with the Gulf country.
If Iran’s allies begin to express open support, we are looking at a much broader and bigger conflict, although the likelihood of such a prolonged war is unlikely.
For the time being, it’s crucial to monitor oil prices closely.
The current surge in prices doesn’t indicate that the conflict will expand significantly. The present rally merely indicates that, similar to previous events, we may witness a larger-scale response from Iran, but beyond that, there will be no further developments.
Essentially, oil traders are not currently factoring in the possibility of a full-scale war with Iran. This is because under such scenarios, oil prices would likely surge, with the only significant price level they could easily reach being the 100-dollar mark.
Central banks around the world have only been able to lower interest rates due to stable oil prices. If oil prices start to rise, they will have no choice but to raise interest rates once more.
Going back to the main fundamentals, traders will pay attention to the US ADP number, as this is going to set the tone for the nonfarm payrolls (NFP) data, due on Friday.
The US ADP sets a low bar, and failure to print a reading above the desired level could intensify the selloff.
The below chart shows important price levels that traders must keep a close eye on for US 30, which is also known as the Dow Jones 30.
US30 Chart by XTB
Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.
