Oil prices jumped on Thursday on renewed Middle East tensions as investors worried about potential supply disruptions, while gold prices climbed to a six-week high on safe-haven demand and expectations of lower US interest rates.
Brent crude eked toward $97 per barrel, while U.S. West Texas Intermediate (WTI) crude traded around $93 a barrel while gold futures jumped almost 2% to $4,473 an ounce in a volatile session on the New York Mercantile Exchange.
Oil Prices Jump on Middle East Tensions
The latest oil price jump comes as tensions between the US and Iran mount.
Brent crude future jumped over 1% to around $97 per barrel, while U.S. WTI gained more than 2% to about $93 a barrel, with both contracts hitting a six-week high.
Markets are spooked by the prospect of the Middle East, one of the key oil-producing regions, becoming a theatre of military conflict.
Strait of Hormuz Drives Market Volatility
Energy markets are especially sensitive to what happens in the volatile region, notably the Strait of Hormuz – a narrow waterway which sees some 17% of the world’s crude oil shipped through it.
Shippers have sharply cut back their activity in the region increasing the risk of a major disruption to energy trade.
Any prolonged closure of this critical chokepoint would send oil prices spiraling higher and add to global inflation already driven by Russia’s war in Ukraine.
Geopolitical Risk Sends Gold Prices Higher
While geopolitical tensions drive up oil prices, they tend to have the opposite effect on the precious metal.
Spot gold jumped about 2% to $4,473 an ounce on Thursday, while gold futures gained over 2% on the NYMEX.
Investors tend to flock towards gold during times of heightened war risk, and tightening monetary policy, or expectations thereof.
Gold is considered a ‘safe haven’ and tends to rise in price when the risks to other asset classes increase.
Federal Reserve Policy Outlook Drives Gold Prices
Gold’s latest jump also reflects concerns about the outlook for inflation and US interest rates.
Gold prices tend to rise when there is an expectation of lower interest rates, with some analysts saying higher rates are a ‘death knell’ for gold prices.
Federal Reserve Governor Christopher Waller suggested on Wednesday that he was likely to vote for a pause in raising interest rates if incoming data confirms that inflation is cooling.
In the wake of these comments, investors sharply reduced their expectations of a rate hike in September.
Jumping Oil Prices Presents Inflation Risk
The key inflation risk on the geopolitical front is that higher oil prices will push inflation higher.
Crude oil is an input to many production processes. Therefore, higher crude oil prices have a direct impact on transportation and commodity prices and therefore global inflation.
Higher oil prices therefore present a risk to Federal Reserve policy and action, which could have a major impact on financial markets and the broader economy.
A Reuters writer noted that rising oil prices will be yet another “supply side risk” to the “already fragile inflation outlook” ahead of the expected pivot in US interest rates.
Higher Gold and Oil Prices Signal Volatile Times Ahead
While oil prices jumping reflect a risk-on attitude of investors, gold prices are a barometer of risk-off conditions.
Higher prices in gold usually reflect rising concerns about geopolitical risk, inflation or a currency crisis.
Gold prices rising at the same time as oil prices usually reflect conditions of uncertainty in financial markets or expectations of currency devaluation.
Key Drivers of Gold and Oil Prices
Investors will be focusing on developments across several fronts in the coming days.
Middle East tensions and the Strait of Hormuz
Brent crude and WTI oil prices
US inflation data
Federal Reserve interest-rate expectations
US employment data
The US Dollar and US Treasury yields
The next employment report and consumer price inflation data due out this week will provide fresh information on the outlook for interest rates.
Oil and Gold Prices Outlook for September 2023
Recent developments in the oil and gold markets are a reminder of how quickly market conditions can change in response to both political and monetary forces.
With crude oil heading toward the $100-per-barrel level and gold trading above $4,400 an ounce, investors are carefully watching both the oil and gold markets.
Should tensions in the Middle East escalate, oil prices could be prone to further jumps on increased risk of supply disruptions.
At the same time, gold prices could jump higher still on both safe-haven demand and expectations of tightening monetary policy.
However, any de-escalation of Middle East tensions would send both oil and gold prices sharply lower.
For now, oil prices and gold prices remain one of the key indicators of geopolitical and macroeconomic risk in financial markets.
