Cautious anticipation in the Middle East

Both major crude oil benchmarks, Brent and West Texas Intermediate, witnessed gains of 1% at approximately 9:30 AM GMT, and this came at the beginning of a week following the severe losses that we had witnessed last week.

Oil’s gains today come with concerns about the possibility of the escalation of military operations in Gaza moving to a new dangerous stage, in addition to the positive signs shown by the Chinese service sector in April and investor sentiment in the Eurozone, which reached its peak in two years.

The decline in hope for the success of the ceasefire negotiations in Gaza has contributed to favoring the worst scenario, which is a large ground operation in Rafah, which regional and international actors continue to warn of its severe consequences that may extend beyond the borders of the current conflict. This in turn raises concerns in the energy markets about the disruption of global supplies.

Meanwhile, this pessimism about the negotiations came with the Israeli side’s adherence to its rejection of the proposal to stop the war and the continued threat of launching the Rafah operation. However, this may come within the framework of pressure to improve negotiating conditions, according to the Wall Street Journal. Therefore, the coming days will be very decisive in the course of the war, as they may be the beginning of an actual path of calm or the beginning of a broad regional escalation that may not be possible to contain.

Today’s data was also encouraging for energy markets, as we saw the Caixin/S&P Global China services PMI report for April. While the headline index reading came in line with expectations at 52.5, this means that services activities expanded for the sixteenth month in a row.

While the report mentioned more positive signs about the future of demand from China, which constitutes a vital factor in supporting oil prices. We witnessed more influx of new business, which grew at the fastest pace in about a year, supported by confidence about the future of the economy and improved demand conditions, which also witnessed further improvement on the part of foreign clients.

Also today, the highest investor sentiment in two years regarding the Eurozone economy helped support oil prices to record further gains.

We witnessed the lowest levels of investor pessimism about the region’s economy since February 2022, with May readings of the Sentix Investor Confidence in the Eurozone coming in better than expected at -3.6. While the Sentix report indicated that German investor sentiment has turned optimistic for the first time since March of 2022.

Oil markets also benefit from the continued decline in US Treasury bond yields, which came after the non-farm payrolls figures that we witnessed last Friday. The labor market data, which were worse than expected, had given some hope to the markets about the possibility of cutting interest rates this year, after the Federal Reserve hinted at this at its last meeting last week.