The Commodities Feed: Oil plunges following US midterm elections
The desk observes that oil markets have reacted strongly to the recent political developments in the U.S. Per the full note from ing-think, following the Democrats' decisive win in the midterm elections, a significant sell-off occurred, with ICE Brent crude prices dropping 8.7% to settle below $95/bbl. The desk believes this decline may be overdone, as the potential for a de-escalation in tensions with Iran could lead to a reduction in market risk premiums, despite uncertainties around potential military actions from the Trump administration. Furthermore, any future oil price movements will hinge on geopolitical developments and market sentiment, particularly concerning oil exports from the Persian Gulf and ongoing sanctions against Iranian oil flows.
What the desk is arguing
The desk posits that current sell pressure in oil may reflect excessive bearish sentiment. Specifically, the market is factoring in a rapid shift towards a more diplomatic approach regarding the U.S.-Iran conflict, a theme echoed in ing-think's analysis of the recent election outcomes.
Given the recent market dynamics, oil prices seemed to have priced in an escalation of U.S. military action, which now appears less likely. The desk highlights that the $95/bbl threshold for Brent serves as a critical psychological level, with further losses raising questions about sustainability in the absence of heightened geopolitical tensions.
Where it sits in our coverage
Currently, the consensus target for Brent crude stands at approximately $95/bbl, with varied predictions across firms capturing a range: - jpmorgan: $94/bbl for Dec-26 - bofa: $98/bbl for Dec-26 - goldman: $97/bbl for Dec-26
This perspective is somewhat divergent from bofa, whose more cautious outlook suggests brent could be closer to $98/bbl by the end of the year. The desk's position aligns with the lower end of the current firm consensus, reflecting a more tempered approach to escalating tensions.
How other firms see it
In alignment with the desk's view are firms like jpmorgan and goldman, which envisage a more stable energy market contingent on diplomatic resolutions. Conversely, bofa presents a bearish stance, forecasting continued volatility in oil prices despite current easing tensions.
Crucially, the trajectory of oil prices may be further influenced by central bank policies, such as anticipated rate changes from the Federal Reserve that impact currency valuations and global demand dynamics. Traders should closely monitor the potential for adjustments in oil supply strategies from OPEC, which could significantly affect price stability moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. political shifts elevate prospects for reduced military conflict in Iran, impacting oil pricing.
- 02Brent crude prices fell to below $95/bbl amid aggressive selling pressure, suggesting potential overreaction.
- 03Markets are leaning towards expectations of de-escalation, with implications for ongoing oil risk premiums.
- 04The next few weeks are crucial in determining whether selling pressure in oil continues or stabilizes.
Market implications
Traders should watch the $95/bbl level for Brent, as a sustained break below this threshold could trigger further downside moves. Oil market sentiment is influenced by geopolitical developments, particularly with respect to U.S.-Iran relations and OPEC's supply decisions. Positioning around these events will be crucial.
Risks to this view
A reversal of the current oil price trend is possible if unexpected military actions are taken by the U.S. against Iran, or if OPEC unexpectedly decreases production levels. Additionally, resurgence in geopolitical risk or supply disruptions could also invalidate the current call for reduced risk premiums in the oil market.
Articles The Commodities Feed: Oil plunges following US midterm elections Published 03:18 Commodities daily Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Energy markets are under significant pressure following the Democrats’ clean sweep in the US midterms as hopes grow that the political shift could accelerate efforts to bring the war with Iran to an end Warren Patterson and Ewa Manthey Energy – Middle East optimism grows following US election Oil markets sold off aggressively yesterday, with ICE Brent settling 8.7% lower on the day and below $95/bbl. Selling pressure has only continued in early morning trading today. The outcome of the US midterm elections, with the Democrats winning both the House and Senate has increased hopes that we could see a quicker end to the war in Iran.
Given the Democrats’ control Congress, there will likely be more scrutiny over the war, while funding it could become more difficult. The outcome of the elections means there could be more pushback from the Republican Party, too. Yet the new senators and members of the House start in January, leaving room for President Trump to escalate if he wants.
Trump has suggested there are no imminent plans to strike Iran. How all this plays out is still highly uncertain. Therefore, the degree and speed to which the oil market has sold off seems to be overdone.
One would think Trump might want to come away with some accomplishments from this war. Does he go about that through renewed strikes or striking a deal? Or by continuing to put pressure on Iran with the ongoing maritime blockade?
In the lead up to the midterms, all signals pointed towards Trump resuming strikes. This is less clear now. In the absence of escalation, the oil market is likely to continue to slowly give back the risk premium it built in recent months, with oil flows from the Persian Gulf holding up well.
This risk premium could disappear even quicker if there’s some sort of agreement between the US and Iran. Fundamentally, the oil market is looking increasingly softer, reflected in the weakening in the physical market as well as timespreads. Inventory data from the EIA yesterday showed that US commercial crude oil inventories fell by 865k barrels over the last week.
When including releases from strategic reserves total crude, inventories fell by 1.26m barrels. Meanwhile, changes on the refined product side were even more supportive, particularly for middle distillates. Despite refineries increasing their utilisation rates by 1.7 percentage points over the week to 94.5%, distillate fuel oil inventories still fell by 3.57m barrels.
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