Oil prices surge over 4% as Middle East tensions soar amid Israel-Hamas conflict

Serene Cheong, Bloomberg October 09, 2023

(Bloomberg) — Oil surged more than 4% after Hamas’ surprise attacks on Israel over the weekend threatened to inflame tensions in the Middle East, home to almost a third of global supply.

West Texas Intermediate rose above $86 a barrel as a war-risk premium returned to markets. The combined death toll topped 1,100 as fighting headed into a third day, while the US said it was sending warships to the region. 

The latest events in Israel don’t pose an immediate threat to oil supply, but there’s a risk the conflict could spiral into a more devastating proxy war, embroiling the US and Iran. Any possible retaliation against Tehran amid reports the Islamic Republic was involved in the attacks could endanger the passage of vessels through the Strait of Hormuz, a vital conduit that Iran has previously threatened to close. 

“Key for markets is whether the conflict remains contained or spreads to involve other regions, particularly Saudi Arabia,” ANZ Group Holdings Ltd. analysts Brian Martin and Daniel Hynes said in a note. “Initially at least, it seems markets will assume the situation will remain limited in scope, duration, and oil-price consequences. But higher volatility can be expected.”

WTI and global benchmark Brent futures had plummeted this month — dropping by around $10 a barrel before the attack on Israel — as worries about high interest rates and slowing growth clouded the demand outlook. Those fears overshadowed bullishness that spurred a sharp rally in the third quarter as physical balances tightened due to prolonged Saudi-led crude output cuts.

The focus will be on the wider fallout between Washington and Tehran after months of thawing relations, a rare prisoner swap and the freeing up of billions of dollars of frozen funds. While crude shipments from Iran have rebounded to a five-year high with America’s tacit blessing, the weekend’s hostilities could prompt the Biden administration to deal more aggressively with those flows, potentially crimping supplies and sending prices higher.

In an extreme scenario, Iran could retaliate and take aim at the Strait of Hormuz, should the Islamic regime find itself in a corner. The waterway is essential for the movement of nearly 17 million barrels of crude and condensate each day, through which major oil-producing and OPEC members such as Saudi Arabia, Iraq and United Arab Emirates export crude.

“If Israel comes out and directly implicates Iran, we believe it will likely be difficult for the Biden administration to continue to adopt such a permissive sanctions regime,” RBC Capital Markets analyst including Helima Croft said in a note. “We anticipate that critics in Congress and elsewhere will contend that the White House is providing Iran with the financial wherewithal to sponsor such malign actors.”

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