Oil prices rise as Middle East ceasefire faces uncertainty

Oil prices surged this week as markets expressed doubts about the durability of a ceasefire in the Middle East. Brent crude rose more than 2% to $96.77 a barrel, while New York light crude climbed almost 3% to $97.23 a barrel. This followed a tumultuous day where Brent had tumbled 13.29% to a four-week low of $94.75 a barrel.

The ceasefire, announced by the US and Iran, appeared to be unraveling as Israel continued its attacks on Lebanon, prompting fears of renewed military action. Iranian parliament speaker Mohammad-Bagher Ghalibaf accused Israel and the US of violating the agreement, while the Revolutionary Guards warned of a "regret-inducing response" if strikes did not cease. The situation escalated further as reports emerged that the passage of oil tankers through the Strait of Hormuz was halted due to Israeli bombardments.

Asian stock markets reacted negatively, with Japan’s Nikkei down 0.7% and South Korea’s Kospi losing 1.7%. European stocks also opened lower, reflecting a decline in optimism following Wednesday's rally. Jim Reid, a strategist at Deutsche Bank, noted that while market stress had eased somewhat, the fragile nature of the ceasefire remained a concern.

Mohit Kumar, chief European economist at Jefferies, suggested that despite the ceasefire's instability, both parties would prefer to maintain it to avoid mutually assured destruction. He emphasized that the ongoing conflict poses significant risks for both the US and Israel, particularly regarding drone interceptors and the strategic importance of the Strait of Hormuz.

What to watch: The upcoming talks led by Vice President JD Vance in Islamabad on Saturday.