Oil prices rise over 3% as Israel weighs response to Iran missile attack

By Myra P. Saefong and William Watts

EIA reports a gain in weekly U.S. crude supplies

Oil futures climbed on Wednesday, extending a rally from a day earlier as investors awaited Israel's response to a massive missile barrage by Iran a day earlier, stoking fears of a wider conflict that could impede flows of crude from the Middle East.

Prices, however, pared some of their gains after the U.S. government reported a weekly climb in domestic crude stockpiles for the first time in three weeks.

Price moves

West Texas Intermediate crude CL.1 for November delivery CL00 CLX24 rose $1.29, or 1.9%, to $71.12 a barrel on the New York Mercantile Exchange.December Brent crude BRN00 BRNZ24, the global benchmark, gained $1.74, or 2.4%, to $75.30 a barrel on ICE Futures Europe.November gasoline RBX24 added 1.5% to $1.09961 a gallon, while November heating oil HOX24 rose 1.9% to $2.2153 a gallon.Natural gas for November delivery NGX24 traded at $2.885 per million British thermal units, down 0.4%.

Market drivers

"It is all about Middle East conflict now when it comes to oil prices," said Fawad Razaqzada, market analyst at City Index and FOREX.com. "The extent of Israel's potential response to Iran will influence how much further geopolitical risk markets are likely to factor in."

"Crude oil could rise another $5 in the next few days if we see further escalation in the conflict," he said in market commentary.

Iran, a member of the Organization of the Petroleum Exporting Countries, on Monday fired around 180 missiles at Israel in retaliation for a series of blows against its proxy Hezbollah. Israel also began a ground incursion in southern Lebanon aimed at Hezbollah earlier Tuesday.

Israel Prime Minister Benjamin Netanyahu vowed late Tuesday to retaliate against Iran, which he said "made a big mistake tonight and it will pay for it."

Most of the missiles were downed by Israel. A similar but smaller attack by Iran in April was followed by a limited Israeli response, leaving no lasting effect on oil prices.

"How Israel responds to the attacks and the subsequent reaction from Iran could easily send WTI futures up or down by 5%+ from yesterday's close in the mid-$70/barrel area," wrote analysts at Sevens Report Research, in a Wednesday note.

"An Israeli attack on any nuclear facilities or oil infrastructure would meet the criteria for the bullish $5 (minimum) oil market rally while a muted response or de-escalation would likely see yesterday's trough-to-peak fear bid of roughly $6/barrel come unwound leaving WTI back in the mid-to-upper $60/barrel range," they said.

See: What Iran's missile attack on Israel means for oil prices

Oil initially rose last October following the Hamas attack on southern Israel, but worries over tepid demand from China and increased output from producers outside of OPEC and its allies have weighed on crude prices overall. WTI is down more than 18% based on front-month contracts over the past 12 months.

Meanwhile, Saudi Arabia's oil minister reportedly warned fellow producers that oil could drop to $50 a barrel if they don't comply with agreed production cuts. The Wall Street Journal reported on the comments made by Prince Abdulaziz bin Salman to other OPEC members, singling out Iraq and Kazakhstan in particular.

Ministers from OPEC+ - made up of OPEC and its Russia-led allies - were meeting Wednesday.

The focus of the meeting will be "getting rid of the overproduction from those not complying" with production targets, Amena Bakr, senior research analyst at Energy Intelligence, said on X Wednesday, and new compensation cut schedules are expected.

OPEC+ is slated to unwind around 180,000 barrels a day of output cuts beginning in December.

Supply data

Oil futures pared a portion of their gains shortly after the Energy Information Administration on Wednesday reported that weekly U.S. crude supplies rose after back-to-back weekly declines.

The EIA said U.S. commercial crude inventories climbed by 3.9 million barrels for the week ended Sept. 27.

On average, analysts had expected no change to crude supplies, according to a survey conducted by S&P Global Commodity Insights. Late Tuesday, the American Petroleum Institute reported a crude inventory fall of 1.46 million barrels, according to a source citing the data.

The EIA report also showed a weekly supply increase of 1.1 million barrels for gasoline, while distillate inventories fell 1.3 million barrels for distillates. The S&P Global Commodity Insights survey showed expectations for supply decreases of 400,000 barrels for gasoline and 1.7 million barrels for distillates.

U.S. oil production rose by 100,000 barrels to 13.3 million barrels per day in the latest week, the EIA said, while crude stocks at the Cushing, Okla., Nymex delivery hub edged up by 900,000 barrels to 23.7 million barrels.

"With even Cushing inventories building, this week's EIA report is leaning bearish, in stark contrast to the current geopolitical backdrop driving prices higher" Wednesday, said Matt Smith, head analyst U.S., at Kpler.

Demand for gasoline, meanwhile, declined, the EIA said. Total motor gasoline supplied, a proxy for demand, was at 8.521 million barrels per day in the latest week, versus 9.205 million bpd from a week earlier.

-Myra P. Saefong -William Watts

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10-02-24 1105ET

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