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Why are oil prices spiking?

By: Hussein Sayed, Chief Market Strategist at FXTM

 Oil prices continue to be front and centre for traders in a relatively quiet market. Brent crude surged 3.5% to trade above $64 on Monday, after the arrests in Saudi Arabia raised investors’ concerns over the stability of the Middle East region.

Comments from Saudi Gulf Affairs Minister, Thamer Al-Sabhan, stating that the government of Lebanon has declared war on Saudi Arabia, added more to oil’s political risk premium.

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Fundamentals remain very positive, with OPEC’s willingness to resume the 1.8 million production cuts, and booming demand from developed and emerging markets. However, conflicts within the Middle East are becoming a major influencer on energy markets, and a further surge in prices will likely be due to political risk premium rather than fundamental support. If tensions escalate further, traders will be targeting $70 for Brent, although such levels may not be sustained in the long run.

In currency markets, the dollar changed little against its major peers, after falling slightly on Monday. There weren’t any significant economic releases to justify the dollar’s weakness, but U.S. Treasury Bonds seem to have a story to tell.

Unlike U.S. stocks, which are showing a very bright economic outlook, yields on U.S. 10-year Treasury Bonds fell for six out of the seven past trading sessions, to trade at 2.31 per cent.