What Iran's attack on Israel means for oil prices

By Myra P. Saefong

WTI, Brent oil prices look to settle below session highs

Iran's attack on Israel is "justification for concern" in the oil markets, but some analysts aren't convinced that the move will lead to any significant, long-lasting disruptions to global crude supplies.

Israel Defense Forces said Tuesday that Israeli civilians were in bomb shelters after rockets from Iran were fired at Israel. The IDF said about 10 million civilians were the "targets of Iranian projectiles."

"For the conflict to have a material and long-lasting impact on the market, this needs to become a broader war with a significant impact on the global economy through constrained oil supply or rising shipping costs, for example, which could upend the current expectations for a rapid rate cutting cycle in most developed markets," wrote Kyle Chapman, FX market analyst at Ballinger Group, in a note published ahead of Iran's attack.

"There is justification for concern," he said, but he believed an attack would be "less of a provocation of war and more of a signal that Iran is not sitting back and doing nothing as its most important proxy is severely weakened." Israel had started military operations in southern Lebanon in its latest offensive against Iran-backed Hezbollah.

Neither party has any strong motivation for the sort of "regional war that would trigger a meltdown," Chapman added.

Prices for oil had rallied by more than 5% to session highs Tuesday before cooler heads prevailed and prices eased back from intraday peaks. November West Texas Intermediate crude (CL.1) (CLX24), the U.S. benchmark, was up $1.72, or 2.5%, at $69.89 a barrel on the New York Mercantile Exchange after trading as high as $71.94. Global benchmark December Brent crude (BRN00) (BRNZ24) traded at $73.42 a barrel on ICE Futures Europe, up $1.72, or 2.4%.

Investors raised concerns of extended limitations or constraints on oil exports from the region, Rob Haworth, senior vice president and senior investment strategist at U.S. Bank Wealth Management, told MarketWatch. A key concern for the escalation between Iran and Israel is that the "missiles or other military equipment would be flying over other countries and collateral damage could drive other countries into the conflict."

To be clear, Iran's oil output is significant - as it is among the top 10 oil producers in the world. In August 2024, Iran's oil production, based on secondary sources, was at 3.277 million barrels per day, according to a monthly report from the Organization of the Petroleum Exporting Countries. The oil market estimates that Iran exports around half of that.

Iranian crude exports amount to nearly 2% of global supply but have been "volatile over the past decade" due to U.S.-led sanctions enforcement, said Robbie Fraser, associate director of global research and analytics at Schneider Electric, in a market report.

Sanctions enforcement has been limited recently, he said, but an escalating conflict could "challenge that approach" - in turn, limiting Iranian crude export flows and lifting global prices.

Fraser said an "intensified sanctions approach would be more than sufficient for returning WTI prices into the $70 to $80 range," and could quickly push prices into $80-plus territory on a prolonged conflict.

For now, Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors, said the impact of an Iran attack on Israel would be "limited, if any."

Israel 'will not hit Iranian oil facilities to avoid angering the Biden administration, [which] wants to keep oil prices low before the election.'Anas Alhajji, Energy Outlook Advisors

Israel itself is not an oil producer and he believes the country "will not hit Iranian oil facilities to avoid angering the Biden administration, [which] wants to keep oil prices low before the election," he told MarketWatch.

Alhajji also pointed out that it's the end of the summer driving season and "a lot of oil is diverted from domestic consumption in the oil-producing countries to exports."

-Myra P. Saefong

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10-01-24 1439ET

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