The Week in Oil: Middle East Escalation Stokes Supply Worries

By Giulia Petroni

Here is a look at what happened in oil markets in the week of Sept. 30-Oct. 4 and what the focus will be in the days to come.

OVERVIEW: Oil prices are headed for strong weekly gains on concerns over supply disruptions in the Middle East, as markets brace for the possibility that Israel's response against Iran's missile barrage will target Iranian oil infrastructure. Brent crude, the international oil benchmark, trades at around $78.70 a barrel, while the U.S. oil gauge West Texas Intermediate is around $74.90 a barrel. Both benchmarks are up 10% on the week in late afternoon trade in Europe, but further gains appear to be capped by persistent demand concerns and fears of a supply surplus next year as The Organization of the Petroleum Exporting Countries and its allies prepare to bring back some barrels into the market.

MACRO: The latest U.S. data showed job growth accelerated and the unemployment rate ticked lower, strongly suggesting the country might be headed toward a so-called soft landing. According to the Labor Department, U.S. employers added 254,000 jobs last month--the largest monthly increase since March--while the unemployment rate slipped to 4.1%.

According to market watchers, the payroll report is likely to close the door on another half-percentage-point rate cut by the Federal Reserve and keep officials on track to lower rates by a quarter point. Meanwhile, U.S. jobless claims rose in the week through Sept. 28, a sign of continued cooling in the labor market.

GEOPOLITICAL RISKS: A direct confrontation between Israel and Iran is fueling fears of an all-out war in the Middle East, lifting prices and keeping markets on edge.

Israel vowed to retaliate against Iran after the country's ballistic missile strike in response to the killing of Hezbollah's leader. Comments by U.S. President Joe Biden this week suggested officials are considering whether to support an Israeli strike on Iranian oil facilities.

Even if Israel decides to strike Iranian oil infrastructure, it is still uncertain what impact that would have on global supplies, according to market watchers.

Analysts at ING said prices could soar if Israel targets Iran's upstream and midstream assets, as that would affect the country's ability to export crude, likely leading to a loss of 1.7 million barrels a day and pushing global markets back into a deficit through next year. An even more extreme scenario would materialize if the conflict disrupts flows through the Strait of Hormuz and Persian Gulf, putting about 14 million barrels a day of oil supply at risk.

A strike on oil infrastructure would boost the risk premium priced into the market, but some analysts expect the impact on supply to be limited and say that any price spike will likely be short-lived, mainly due to prospects of additional OPEC supply hitting the market and plenty of spare capacity serving as a buffer.

SUPPLY AND DEMAND: A meeting of top OPEC+ ministers kept policy unchanged--including a plan to start raising output in December--bringing concerns over weakening prices and a market surplus back into focus. The group plans a 180,000 barrels a day output increase in December as part of a plan to gradually unwind 2.2 million barrels a day of voluntary curbs until November 2025.

In the U.S., the latest Energy Information Administration data showed domestic crude inventories unexpectedly rose 3.9 million barrels last week, adding evidence that the market is well supplied and can withstand any disruptions, according to ANZ Research analysts.

Meanwhile in Libya, the state-run oil company said it would resume production at the Sharara and El-Feel oil fields, and export shipments from Es Sider, the country's largest port. The news came after Libya curtailed production and halted exports amid a political crisis, fueling global supply concerns.

A massive port strike across the U.S. East and Gulf Coasts threatening to disrupt trade of key commodities also dominated headlines this week. But ports began reopening late on Thursday after dockworkers and port operators reached a wage deal.

WHAT'S AHEAD: Traders will continue to closely watch development in the Middle East, waiting for Israel's response against Iran to assess the potential impact on oil supplies and prices. At a macro level, all eyes next week will be on U.S. inflation data, with Thursday's Consumer Price Index and Friday's Producer Price Index data likely providing more clues on the Fed's next policy move.

Write to Giulia Petroni at giulia.petroni@wsj.com

(END) Dow Jones Newswires

October 04, 2024 13:02 ET (17:02 GMT)

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