Israel-Hamas-Hezbollah tensions rally oil, but July weakness hints at long-term worries

By Myra P. Saefong

An OPEC+ monitoring committee is expected to meet on Thursday

A rally in oil futures Wednesday comes as no surprise as violence in the Middle East, including the assassination of a Hamas leader in Iran, raises the potential for a wider war in the oil-rich region.

Crude, however, still ended the month with a loss, with worries over a slowdown in Chinese demand and uncertainty surrounding production quotas for major oil producers influencing the path for prices in the months to come.

July's selloff, in part, has been driven by a "deteriorating picture for domestic demand in China," with that country's crude imports finishing July at their "slowest monthly pace in a year and a half," said Matt Smith, head analyst for the U.S. at Kpler.

Still, "the U.S. backdrop is nowhere near as pessimistic," he said, as the latest weekly Energy Information Administration report shows implied gasoline demand continues to hold up. He noted that the four-week average for implied gasoline demand is 4.2% higher year over year.

Read: Oil futures rise for first time in four sessions after strike kills Hamas leader in Iran

Geopolitical risk continues to provide the "biggest upside concern for oil here, whereas Chinese demand weakness is one of the key counterweights, at least for now," Smith said.

On Wednesday, September West Texas Intermediate crude (CL.1) (CLU24), the U.S. benchmark, settled at $77.91 a barrel on the New York Mercantile Exchange, up $3.18, or 4.3%, for the session. Prices posted the largest percentage rise since Oct. 13, 2023, according to Dow Jones Market Data. They still ended nearly 4.5% lower for the month.

Global benchmark Brent crude for September delivery (BRNU24) added $2.09, or 2.7%, to end at $80.72 a barrel on ICE Futures Europe on the contract's expiration day. It lost 6.6% for the month. October Brent (BRN00) (BRNV24), which became the front month, added $2.77, or almost 3.6%, to $80.84.

Middle East violence

News that Hamas leader Ismail Haniyeh was killed in an airstrike in Iran on Wednesday, with Iran and the militant group Hamas blaming Israel, led to a rally for oil prices. Separately, Israel said it carried out an airstrike in Beirut that killed a Hezbollah commander.

The assassination of Haniyeh moves this conflict "appreciably up the escalatory ladder and edges the region closer to a wider war," Helima Croft, head of global commodity strategy and Middle East and North Africa research at RBC Capital Markets, said in a note Wednesday.

The Beirut strike "seemingly falls largely in the established engagement parameters between Israel and Hezbollah," she said, but the killing of Haniyeh on Iranian soil could "trigger a dangerous kinetic response from the Iranian leadership."

In April, the Iranian response to the killing of a senior Islamic Revolutionary Guard Corps commander in Damascus appeared "dramatic" but resulted in minimal damage, Croft said, while the Israeli retaliatory strikes on Iran, while also providing "shock and awe optics ... stopped short of provoking a wider conflict."

This time, "we are not certain whether the same containment dynamics will prevail, especially given that this current chapter involves Hamas, Hezbollah, as well as Iran," she said.

"At the very least, events of the last few days could trigger a dangerous fog of war dynamic, where red lines are imperceptible and the risk of serious miscalculation is magnified," she said.

Potential Iran involvement

A big concern for oil in the Middle East has been Iran's potential involvement in a wider war in the region.

Despite sanctions, Iran has been gradually increasing its oil production since the start of the decade, said Kpler's Smith.

That shows in its gradually rising exports, which are "currently pushing above 1.5 million barrels per day after being at just a few hundred thousand barrels per day at the turn of the decade," he said.

"Sanctions on Iran are currently not worth the papers they are written on, since they are not being enforced," said Manish Raj, managing director at Velandera Energy Partners. "We remain skeptical that Iranian sanctions will be tightened."

This close to the U.S. presidential election, "nobody in U.S. circles wants a higher oil prices," he told MarketWatch. "Therefore, we believe that the U.S. will seek peace and not tightening or enforcement of sanctions."

OPEC+ moves

Meanwhile, the Organization of the Petroleum Exporting Countries and its allies, together known as OPEC+, are expected to hold a meeting of the Joint Ministerial Monitoring Committee Thursday via videoconference to review oil-market developments.

At a meeting June, OPEC+ said that a round of voluntary cuts totaling 2.2 million barrels per day - including a reduction of 1 million barrels per day by Saudi Arabia - that were due to expire at the end of that month would be extended through September, then gradually restored on a monthly basis until the end of 2025.

It also said at the time that the phaseout of the cuts could be stopped or reversed, depending on market developments.

Amena Bakr, senior research analyst at Energy Intelligence, said on X Wednesday that "there's no expectation that the JMMC tomorrow would recommend any change to Opec-plus's oil production policy. The heightened geopolitical risk in the region and its impact on markets is not something Opec-plus can control."

If OPEC+ continues to look toward rereleasing crude from the fourth quarter of this year, "we'll see a sharp drop in the last 120 days of the year," said Tom Kloza, global head of energy analysis at OPIS, an energy-data and analytics provider that is part of Dow Jones, the publisher of MarketWatch.

Oil has already failed to rally on a number of bullish factors, including bets for strong demand in August, which tends to be the highest-demand month of the year; tropical weather in the central Atlantic; and the disputed Venezuelan election, he said.

"There's a lot of confidence in demand outstripping supply for the next 45 days, but it gives way to concerns about a reversal after that period, particularly if OPEC+ restores some barrels previously cut," Kloza said.

-Myra P. Saefong

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07-31-24 1503ET

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