Oil set for biggest weekly gain since early 2023

October 04, 2024 (MLN): Oil rose further after its biggest one-day jump in almost a year, amid concerns that Israel may decide to strike Iranian crude facilities in retaliation for a missile barrage.

Brent crude rose above $78 a barrel after surging by 5% on Thursday as President Joe Biden said the US was discussing whether to support potential Israeli attacks on Iranian energy infrastructure.

The global benchmark is up about 8% this week, the most since early 2023.

While West Texas Intermediate crude (WTI) was at $74.3 per barrel.

A US official said later the administration was still in talks with Israel and believed no decision had been taken yet, as Bloomberg reported.

The escalation of hostilities has raised the possibility Middle East oil supplies could be disrupted. Israel and Iran, as well as Tehran’s proxies in Lebanon, Gaza, and Yemen have been facing off for the past year, stoking fears of an all-out conflict that could drag in other countries.

There are “fears that Israel will target Iran’s oil production capabilities, so as to hit Iran where it hurts – its pocket,” said Vishnu Varathan, the Asia head of economics and strategy at Mizuho Bank Ltd. in Singapore. While prices have surged, oil likely hasn’t fully priced in an all-out war, he said.

Iran fired a barrage of missiles into Israel earlier this week, after Israel stepped up its offensive against Tehran-backed Hezbollah, including sending troops into southern Lebanon.

The Group of Seven nations has called on countries in the region “to act responsibly and with restraint”.

The Middle East accounts for about a third of the world’s crude supply. Iran has been pumping about 3.3 million barrels of crude a day in recent months, making it the third-largest producer in the Organization of the Petroleum Exporting Countries.

Citigroup Inc. has estimated that a major strike by Israel on Iran’s export capacity could take 1.5 million barrels of daily supply off the market. If Israel struck minor infrastructure, 300,000 to 450,000 barrels could be lost.

There’s also concern that Tehran could raise the stakes by targeting energy infrastructure in neighboring states, or supply routes including the critical Strait of Hormuz.

Clearview Energy Partners said a disruption to flows through the narrow waterway at the mouth of the Persian Gulf could drive crude $13 to $28 a barrel higher.

Others were skeptical about the likelihood of significant market disruption. An attack by Israel against Iran’s oil facilities was the “least likely” option, according to ANZ Group Holdings.

Such a move would upset Israel’s partners, including the US, and may also induce a more severe response from Tehran, analysts Daniel Hynes and Soni Kumari said in a report.

Still, options markets are flashing warning signs, as investors bet that oil could rise further. Brent call options, which profit from when prices rise, were at the widest premium to the opposite puts in a year, as of Thursday’s close. Implied volatility has also spiked.

Beyond the crisis, the OPEC+ alliance has reaffirmed a plan to start restoring some shuttered capacity from December, while Libya has been restarting output after a political standoff in the country eased.

There are indications in the physical market that the backdrop remains weak, and it’s not clear if a major Chinese stimulus package will have much impact on consumption in the world’s biggest importer.

Copyright Mettis Link News