Meanwhile, the Fed says  war-related oil shock won't necessarily lead to recession: File Image/Pixabay

As expected, Wednesday’s late news that the U.S. had brokered a ceasefire between Israel and Lebanon resulted on Thursday in oil prices dropping by about 3 percent, as the suspension of hostilities was Iran’s main demand in resuming its peace deal negotiations with the U.S.

However, while oil traders were swayed, military leaders with more experience in Middle East affairs said Iran was not interested in being negotiated into normal statehood.

Robert Maginnis, senior fellow for national security at the Family Research Council, wrote that “If the talks produce a deal, Iran will parse every provision for leverage…if they collapse, Tehran will absorb the damage, reconstitute where possible, and present itself to the Muslim world as the power that defied America again.”

Brent on Thursday settled down $2.78, or 2.8 percent, at $95.03 per barrel, while West Texas Intermediate settled down $2.98, or 3.1 percent, at $93.04 per barrel.

John Kilduff, partner at Again Capital, noted that "This latest development with Israel and Lebanon is pulling the rug out from under any sort of bullish thesis today.

"Once again, the market is giving full credit to hopes of a resolution here and the worries about supplies are just ⁠not registering with the market."

Dennis Kissler, senior vice president of trading at BOK Financial, addressed the focal point of analytical concerns by remarking, "Shipping traffic in the Strait of Hormuz remains at a near standstill; however, some ship re-positioning shows them moving closer to the Persian Gulf, which could be a sign of an expected opening sooner than later."

Robert Rennie, head of commodity research at Westpac Banking Corp., noted that Brent could climb as high as $130 per barrel in the fourth quarter as inventories tighten: “The market is asleep at the wheel, even as we drive rapidly toward aggressive tightening in crude and product markets.”

Meanwhile, a new study from the Federal Reserve Bank of Boston suggested that the idea of every oil shock leading to recession is outdated, thanks to rising domestic oil production resulting in a U.S. that remains vulnerable to energy inflation but is less likely to suffer the employment damage seen in the 1970s oil crisis.

The Fed estimated that the current oil shock caused by the U.S./Iran war would add about 1.5 percentage points to inflation over the following year. Whereas in the 1970s, a comparable shock would have pushed inflation up by roughly 2.2 percentage points.

Also, such a shock would have reduced employment growth by about 1.8 percentage points in the 1970s; but today, that effect has largely vanished.