(Bloomberg) -- Oil pulled back after its biggest gain in more than nine months as signs of a slowing US economy countered concerns that the conflict in the Middle East may endanger supplies.
West Texas Intermediate fell 2.1%, reversing earlier gains, to settle below $77 a barrel. Crude had rallied 4.3% on Wednesday, the biggest daily gain since October.
Markets shied away from risk-assets Thursday after data showed US manufacturing activity shrank the most in eight months, stoking fears crude demand may weaken. Meanwhile, a report that Iran plans to retaliate against Israel for killing a Hamas leader on its soil is raising concerns the conflict may spiral into a broader war that embroils the US and Iran, possibly hampering crude exports.
While the geopolitical tensions “definitely deserve market respect,” oil’s recent rally is a bit overdone, said Dennis Kissler, senior vice president for trading at BOK Financial Securities.
“Until we see global supply actually taken off the market, I believe we’re getting overextended,” especially considering the signs of global economic slowdowns, he said.
Iran’s Ayatollah Ali Khamenei ordered a direct strike on Israel, the New York Times reported. That comes after Iran said Israel assassinated the political leader of Hamas in Tehran, shortly after killing a senior member of Hezbollah in Beirut.
Meanwhile, US officials are still pushing for a cease-fire in Gaza, but concede it’s harder than ever after the death of Hamas’ political leader Ismail Haniyeh — a key representative during the negotiations.
As with other periods of geopolitical turmoil in recent months, there’s been a flurry of activity in the oil options market. Call volumes were the highest since April on Wednesday, while traders are now paying a rare premium for those contracts over bearish ones.
The escalation comes as a review meeting by key members of the Organization of the Petroleum Exporting Countries and its allies made no recommendation on output policy. The group has previously announced plans to gradually restore output starting in October, but reiterated that it can pause or reverse the move if it needs to.
Crude is still higher this year despite logging a monthly decline in July as concern increased over demand from top importer China, with data Thursday showing a surprise contraction in manufacturing.
Bullishness has been driven by tensions in the Middle East, OPEC+ curbs and expectations that monetary easing would boost US demand. Federal Reserve Chair Jerome Powell said Wednesday that an interest-rate cut could come as soon as September.
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