Oil Futures Extend Rally on Middle East Geopolitical Tensions

By Anthony Harrup

Oil futures added to last week's heavy gains as traders hedge against the possibility of Israel striking Iranian energy infrastructure in response to last week's missile attack.

Brent crude rose 3.7% Monday to $80.93 a barrel on ICE Futures Europe, and West Texas Intermediate crude settled up 3.7% at $77.14 a barrel on the New York Mercantile Exchange. The benchmarks both rose 9.1% last week

Whether prices remain high amid broader concerns about weakening global demand could depend on whether a feared disruption to oil supplies comes about.

After spiking when Hamas launched an attack against Israel a year ago, setting the Gaza conflict in motion, crude prices fell back and have remained range-bound as risks to physical supplies were seen as limited. Oil prices also largely shrugged off Houthi rebel attacks on shipping in the Red Sea once the extra cost of carrying oil and goods around Africa had been factored in.

Following last week's missile strikes on Israel by Iran, the risk of supply disruptions has increased, David Oxley, chief climate and commodities economist at Capital Economics said in a note.

"The biggest risk is of a tit-for-tat escalation that ends up disrupting shipping in the Strait of Hormuz," he said. "The risk premium is going to dominate in the near term; depending on how things pan out, it could conceivably add another $20 a barrel to oil prices."

At issue is whether Israel, which has said it will retaliate for last week's attacks, decides to strike Iranian energy infrastructure.

Goldman Sachs assumes that there won't be a major oil supply disruption and maintains its estimate for Brent crude at $70 to $85 a barrel with estimates of $77 for the fourth quarter and $76 a barrel for 2025.

Brent prices could hit $90 or more, however, in the event that Iranian oil supply is affected, analysts at Goldman Sachs said in a report Friday, with the price impact depending on other members of the Organization of Petroleum Exporting Countries raising output to offset the loss.

Assuming a 2 million barrels a day reduction in Iranian supply for six months "we estimate that Brent could temporarily rise to a peak of $90 if OPEC rapidly offsets the shortfall, and a 2025 peak in the mid-$90s without an OPEC offset," they said.

A persistent loss of 1 million barrels a day, such as from tighter sanctions enforcement, may push Brent to the mid-$80s with OPEC offsets, and a 2025 peak in the mid-$90s without offsets, Goldman added.

OPEC+, which also includes Russia, Kazakhstan and other non-OPEC members, last month confirmed plans to start unwinding 2.2 million barrels a day of voluntary production cuts in December. The prospects of increased supply in 2025 amid weakening demand, particularly from China, has kept crude prices low.

Market positioning also makes a difference with the latest intensification of the Middle East conflict, analysts at Citi Research said in a report last week. They noted that when Iran fired missiles and drones at Israel in April, long positions in the oil market were stretched while recently, net positioning had been at historic lows, prompting short-covering.

"Still, if geopolitical tensions ease, oil prices should see renewed downside pressure ahead of loosening balances in 2025," Citi added.

Write to Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

October 07, 2024 16:03 ET (20:03 GMT)

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