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Investors who rushed into oil thinking it could be a hedge to the Israel-Hamas war are beginning to find out that black gold isn't quite the haven that gold itself is reputed to be.
Crude prices tumbled another 2% Tue, adding to the previous session's 3% rout, wiping out a chunk of the gains from the past two weeks derived from the Middle East's latest conflict.
Brent crude for Dec delivery settled at USD88.07, down nearly 2%. Brent fell 2.5% in the prior session. Last week, it rose 1.4%, adding to the prior week's gain of 7.5%. Tue's session low for Brent was USD87.36.
WTI crude for Dec delivery settled at USD83.74, down 2% on the day. On Mon, WTI fell 2.9%. It rose 2% last week and around 6% the prior week. Tue's session low was USD82.97, putting it not too far from the two-month low of USD81.50 struck on Oct. 6, a day before the outbreak of fighting in Gaza.
Oil's rally over the past two weeks was driven by global shock over the death toll emanating from Israel's response to the Oct 7 attacks carried out by Hamas, and concerns of a contagion should the crisis spill over and impact neighbouring countries, which include some of the biggest oil producers such as Saudi Arabia, the United Arab Emirates, Iraq and Kuwait.
Conversely, the market's retreat comes amid diplomacy efforts by the United States and other world powers in convincing Israel to delay a ground assault on Gaza while they try and negotiate the release of an estimated 200 Israeli hostages being held by the Palestine militant group.
Adding to Wed's bearish mood in oil was dire economic data out of Europe. German readings suggested a recession was underway. Britain's businesses reported another monthly decline in activity, highlighting recession risks ahead of the Bank of England's interest rate decision next week.
"I think it's beginning to dawn on some people that you can't put black gold and gold in the same bucket when looking for a hedge to this war," John Kilduff, partner at Again Capital, said.
"The crux of the matter is that oil is a commodity that derives its net worth from consumption by demand. Gold, on the other hand, is more of an insurance against economic and political troubles like these. There's been no direct impact thus far on the oil trade from the crisis and, therefore, it's only right that crude prices give back the gains they've been running up the past two weeks."
Gold hit three-month highs last week as investors sought a hedge to the war, with New York traded futures breaching USD2,000 an ounce. It has eased since from those highs but remains largely in a bull market, technical charts show.
Market participants were also on the lookout for U.S. weekly oil inventory data, due after market settlement from API. The numbers serve as a precursor to official inventory data on the same due from the EIA on Wed.
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